New guidelines for fair IPO coming up

The Securities Board of Nepal (SEBON) is preparing to set in place a new set of guidelines intended to raise the chances of small investors to get shares during initial public offerings (IPOs).

The guidelines are directed at removing the existing loopholes that allow players to submit large numbers of share applications with counterfeit paperwork to back them up. This illegal practice has been making it difficult for genuine and small investors to buy shares during IPOs.

The Registration and Issue Guidelines make it mandatory for all prospective investors in an IPO to open a bank account to receive refunds of their money after the allotment of shares.

Presently, the issue manager makes refunds in cash. This has induced prospective investors to apply for shares in the names of hundreds of acquaintances using their citizenship certificates to increase their chances of getting a higher allocation of shares. A SEBON official says once the guidelines go into effect, such investors will not be able to make use of their usual tricks.

“The guidelines are awaiting endorsement by the Ministry of Finance before they can be enforced,” said SEBON chairman Dr Chiranjiwi Nepal.

Once the new regulations are put in force, companies can issue shares at a premium price. As of now, they are required to make IPOs at face value, which is normally set at Rs 100 a unit. “We have allowed the companies to set the premium price as high as 2.5 times the book value,” said Nepal.

He said the guidelines would also require companies to publish a more detailed and informative prospectus to provide clear information to aspirant investors. “Apart from SEBON, they must forward the prospectus to the stock exchange,” he added.

Moreover, there is a provision in the guidelines requiring the issue manager to keep the applicants' money with the Nepal Rastra Bank for at least three days after the IPO has closed. “This is to discourage the practice of applying for shares using 'paper' money,” said Nepal.

The stock regulatory body has recently issued a four-point set of directives to issue and sale managers to address shortcomings in the IPO process. It requires issue managers to pay interest on the money investors deposit with their share applications.

Meanwhile, SEBON is going to set up a securities data management system (SDMS) which will maintain profiles of the companies and their promoters and data about merchant banking and intermediaries. Nepal said the SDMS was being established with a Rs 6.2 million assistance from the World Bank. “This is aimed at providing complete information to investors to allow them to make informed decisions about shares,” he added

The move also opens the possibility for online application of shares during IPOs, which will eventually shorten the allocation period, he said.
Source: eKantipur