Banking News – The Independent Power Producers’ Association, Nepal (IPPAN) has demanded a review of the draft “General Eligibility Standards for Public Issuance Directive, 2083” proposed by the Securities Board of Nepal (SEBON), keeping in mind the nature and capital requirements of the hydropower sector. IPPAN has suggested removing and amending various provisions in the proposed draft, stating that the proposed arrangement could affect capital management, the public issuance process, and investment continuity of hydropower projects.

IPPAN has also registered suggestions with SEBON regarding the directive proposal. IPPAN Chairman Mohan Dangi stated that since the energy sector is directly linked to economic development, industrialization, job creation, revenue mobilization, and foreign exchange earnings, hydropower projects should be viewed as a sector requiring long-term and large-scale capital, and conditions that obstruct investment should not be imposed. According to him, while creating public issuance arrangements, attention must be paid to investor protection as well as the nature and capital requirements of the project.

“A separate regulatory arrangement is necessary for the hydropower sector compared to other sectors,” he said. “Since the business nature and capital structure of banking, insurance, hydropower, pharmaceutical, and manufacturing industries are different, applying the same standard to all institutions is not appropriate.” He suggested creating a separate chapter and separate IPO checklist for the hydropower sector.

Demand to Remove Provision Blocking IPOs for Projects Not Yet in Operation

In the draft issued by SEBON, a provision has been proposed requiring hydropower companies to have continuously operated their business before issuing ordinary shares. IPPAN argues that this provision is impractical for hydropower projects and should be removed. IPPAN claims that since hydropower companies are considered “operational” only after their promoted projects are completed and go into power generation, if that term remains, projects under construction would not even be able to apply for IPO issuance. IPPAN Chairman Dangi also stated that since hydropower projects require large capital during the construction phase itself, an arrangement allowing public investment mobilization at that stage is necessary. IPPAN has suggested making a provision allowing hydropower projects to apply for IPOs after reaching approximately 65 percent physical progress. IPPAN has also suggested creating a separate IPO checklist for hydropower according to the nature of the project.

IPO Issuance Should Be Allowed Even If Net Worth Is Below Face Value

IPPAN has demanded that the net worth provision proposed in SEBON’s draft, which states that the per-share net worth of an organized institution should not be below face value, be removed for productive industries, particularly hydropower projects. “During the construction period of a hydropower project, the company’s net worth can fall below even Rs 90 due to depreciation. But once the project is completed and goes into power generation, the income situation becomes different, so IPOs should not be blocked based only on net worth during the construction period,” said Chairman Dangi.

IPPAN has suggested opening the path for public share issuance by disclosing full details, underwriting, and credit rating, and informing investors about risks. IPPAN claims that if the proposed net worth provision remains as is, approximately 60 percent of hydropower projects could be in a situation where they cannot issue shares to the general public. IPPAN has suggested to SEBON that a provision be included allowing IPO issuance for hydropower companies even with net worth up to Rs 90, considering ‘power value’ as a basis as well.

SEBON Should Not Determine Debt-Equity Ratio

The draft directive proposes that SEBON may determine standards related to sector-specific debt-equity ratio, interest payment capacity, and other financial indicators. IPPAN has suggested removing the debt-equity ratio provision entirely. According to IPPAN, since how much debt and how much equity a hydropower project takes is related to the project’s financial management, if a provision is made requiring SEBON approval again at the time of IPO issuance on such matters, another layer of regulatory approval would be added before financial management of the project. IPPAN argues that once a financial management agreement for the project has been made with a bank, SEBON should not stop the process by examining the debt-equity ratio again during IPO issuance. It states that such an arrangement could also create problems in long-term equity ratio management.

‘Fit and Proper’ Test for Thousands of Founder Shareholders Impossible

The draft directive proposes that the ‘fit and proper’ test of founder shareholders, directors, and chief executive officers of institutions wishing to go for public issuance be conducted by SEBON. IPPAN states that founder shareholders should not be included in this. “A single hydropower project can have thousands of founder shareholders. Conducting a fit and proper test and declaration for each founder shareholder may not be practically possible. Therefore, such an arrangement should be limited to directors and management,” the suggestion paper submitted by IPPAN to SEBON states.

Similarly, IPPAN has stated that it would not be justifiable to block a company’s IPO in a way that affects thousands of other investors because one founder shareholder is blacklisted or involved in a financial crime. IPPAN has demanded that the draft clarify who the provision about the period not having passed since release from blacklisting is targeted at. Similarly, the draft proposes that the board may set additional conditions while approving public issuance if the proposed arrangement is deemed necessary for investor protection, market stability, financial system stability, and public interest. IPPAN has demanded removal of this provision. IPPAN argues that such an arrangement could grant unlimited discretionary powers to SEBON staff and increase the possibility of irregularities.

Similarly, the draft directive proposes allowing independent legal examination of agreements between construction contractors and promoter companies. IPPAN has also demanded its removal. IPPAN argues that the arrangement for SEBON to conduct legal examination or forensic audit of private business agreements between construction contractors and promoters falls outside its jurisdiction. Similarly, a suggestion has been made to remove separate rules regarding independent opinions of valuators, technical experts, environmental experts, or other related persons. IPPAN has stated that since arrangements for technical and cost-related due diligence of projects exist elsewhere, an additional party is not necessary for the same work. It states that environmental matters also do not fall within SEBON’s jurisdiction.

Demand to Make IPO Approval Process Time-Bound

IPPAN has demanded setting a clear timeline for preliminary examination and detailed evaluation by SEBON. Noting that although the draft directive includes provisions for examining application completeness, documents, fees, and minimum legal eligibility, and for requesting further details or returning applications, no definite timeline has been proposed for this, IPPAN has requested SEBON to create a time-bound process. IPPAN has suggested that preliminary examination should be completed within 15 days of receiving the application, and if additional documents are requested, examination should be completed within 7 days of receiving the documents. A suggestion has also been made to complete detailed evaluation within 45 days and make a mandatory decision within a maximum of 60 to 90 days. IPPAN has stated that such a timeline would control the tendency of keeping files pending for a long time after public companies have submitted necessary documents.

Suggestion Not to Include ‘Environmental Risk’ Issue

The draft directive proposes considering environmental risk as a basis while evaluating hydropower companies’ share issuance applications. IPPAN has demanded its removal. IPPAN argues that since there are relevant bodies for environmental studies and related regulation, including environmental risk-related matters in SEBON’s directive is not necessary.

Similarly, IPPAN has suggested that SEBON’s proposed provisions allowing additional information, expert opinion, on-site inspection, special audit, or re-due diligence if deemed necessary should be organized with clear standards. IPPAN states that since the vague wording “if deemed necessary” could create discrepancies in regulatory decisions, it should be clarified under what circumstances such authority would be exercised.

Basis for Rejecting Applications Must Be Clear

The draft directive proposes that IPO approval may be rejected if important facts are concealed, false or misleading information is provided, minimum eligibility is not met, there are serious weaknesses in institutional governance, or there are circumstances adversely affecting the interests of public investors. IPPAN has demanded further clarification, stating that terms like “financial condition being contrary to the interests of public investment” and “circumstances adversely affecting the interests of general investors” are vague. It states that the bases for regulatory decisions must be measurable and clear.

Old Rules for Hydropower Projects in the Pipeline

IPPAN has demanded that hydropower companies that have already registered applications for IPOs before the new directive comes into effect — that is, those in the pipeline — should not be affected by the new standards. IPPAN has also suggested that hydropower companies that have registered applications for share issuance under SEBON’s previous “General Eligibility Standards for Public Issuance Directive, 2074” should be granted permission under the old rules. It has demanded giving companies sufficient transition time even after the new directive comes into effect. IPPAN has stated that the new public issuance arrangement should be made in a way that facilitates capital mobilization for real sector companies along with investor protection, governance, and transparency. IPPAN maintains that since the need for long-term capital in the hydropower sector is high, regulatory reform could affect the project construction and capital mobilization cycle itself.