The term IPO, short for Initial Public Offering, refers to the process by which a company or an organized institution sells its shares or securities to the public for the first time. In simple words, an IPO is the public’s first opportunity to buy a company’s shares directly from the company itself.
Companies go public and issue IPOs for several reasons, and understanding these reasons helps investors grasp how Nepal’s capital market functions.
Why Do Companies Issue IPOs?
There are three main reasons why a company might decide to issue an IPO:
1. Regulatory or Policy Requirements
In some sectors, the government or regulatory bodies require companies to sell shares to the public. This ensures that local citizens can benefit from the profits generated by companies that use public or natural resources. A clear example is the hydropower sector, where companies are required to allocate a portion of their shares to the public living near the project area.
2. Legal Requirements for Financial Institutions
Banks, insurance companies, and other financial institutions must operate as public limited companies according to Nepali law. Since these institutions collect deposits, premiums, or other funds from the public, their operations must remain under public oversight.
3. Raising Capital for Business Expansion
Companies often need more funds to expand their operations. Issuing shares to the public through an IPO allows them to raise money without taking on debt. This is one of the main reasons many hydropower and manufacturing companies have recently entered the stock market.
How Do Companies Raise Capital?
Businesses generally have two ways to raise money:
- Borrowing through loans or bonds: This involves a commitment to pay interest or returns at a fixed rate. Since interest has to be paid regardless of profit, this type of funding is considered more expensive.
- Selling shares to the public: By selling ownership stakes (shares), companies don’t have to promise fixed returns. Dividends depend on the company’s performance, making this a cheaper and more flexible source of capital.
Therefore, when companies need funds for growth, expansion, or regulatory reasons, they often choose to issue IPOs.
Why Is Listing on the Stock Exchange Important?
An IPO also allows a company to list its shares on the stock exchange, giving investors the ability to buy and sell shares freely. Without an active trading platform and exit option, large-scale investments would be less attractive. IPOs thus help companies build credibility, attract investment, and provide liquidity to shareholders.
The IPO Process in Nepal
In Nepal, IPOs are issued mainly through three methods: Par Value Issue, Premium Issue, and Book Building. There’s also a fourth method known as Offer for Sale.
1. Par Value Issue (at face value)
This is the most common method in Nepal. Under this system, companies that have completed a minimum operating period and meet the criteria set by the Securities Registration and Issue Regulation, 2073, can issue shares to the public at face value, usually Rs 100 per share.
Key Conditions for Par Value IPOs:
- The company must have operated as a limited company for at least one fiscal year, completed audits, and received approval from its annual general meeting (AGM) to go public.
- The company can issue a minimum of 10% and a maximum of 49% of its issued capital to the public.
- None of the company’s major shareholders (owning 1% or more) should be blacklisted.
- Banks, insurance, and finance companies must have approval from their regulators.
- Hydropower companies must have completed at least 40% of their project construction and secured financial closure before issuing shares.
Once these requirements are met, the company appoints an issue manager and an underwriter, obtains a credit rating, and submits its prospectus to the Securities Board of Nepal (SEBON) for approval.
2. Premium Issue
A premium IPO allows companies to sell shares at a price higher than the face value. This is common among profitable or well-established firms.
Conditions for Issuing at a Premium:
- The company must have been profitable for at least the last three consecutive years.
- Its net worth per share must exceed its paid-up capital per share.
- The company must receive at least a BBB- credit rating or above.
- The premium price must be verified by external financial experts and underwriters.
The premium is usually determined through valuation methods like Capitalized Earnings, Discounted Cash Flow (DCF), or internationally accepted standards. SEBON reviews the calculations before granting final approval.
3. Book Building Method
Book building is a newer method in Nepal, more common in developed markets. Under this process, 40% of the shares are reserved for qualified institutional investors (QIIs) and 60% for the general public.
Institutional investors bid for shares within a price range, and the price at which all shares are sold becomes the cut-off price. The general public then gets shares at a 10% discount from this price.
Requirements for Book Building:
- The company must have earned profit continuously for the last three years.
- Its net worth per share should be at least 150% of paid-up capital.
- It must hold at least a BBB- credit rating.
- It must sign agreements with an issue manager and the stock exchange for automated bidding.
Book building helps determine the real market value of a company’s shares through investor demand.
4. Offer for Sale
In this method, existing shareholders of a listed company can sell their holdings to the public with SEBON’s approval. If the company is not yet listed, shareholders holding at least 10% of paid-up capital can sell shares publicly through auction. Nepal Telecom’s share sale by the government was conducted using this method.
The Role of Regulators
Every IPO in Nepal requires approval from the Securities Board of Nepal (SEBON). The board ensures that companies meet legal standards, provide accurate financial disclosures, and protect investors from misleading information.
Final Thoughts
IPOs play a key role in Nepal’s financial ecosystem. They help companies raise funds without heavy borrowing, allow citizens to share in corporate growth, and contribute to a more transparent and participatory economy. For investors, understanding how IPOs work — from eligibility and pricing to risk assessment — is essential before making investment decisions.