Till now, companies used to issue Initial Public Offering (IPO) at par or at premium (upon meeting stringent criteria) in Nepal. Free Pricing method in IPO in Nepalese capital market is a new concept. Mr. Deepesh K Vaidya, Managing Director of Kriti Capital & Investments Ltd (a leading merchant bank in Nepal) presented about this method to the regulator : SEBON and other stakeholders.

1. FREE PRICING IN IPO: MARKET PERSPECTIVE
WORLD INVESTORS WEEK, 2020
Organized by:
Securities Board of Nepal
Presented By:
Deepesh Vaidya
Professional – Capital Markets
deepesh@kriticapital.com.np

2. A Case Study – Shivam Cement

3. A Case Study – Shivam Cement
Initial Public Offering (IPO)
Initial Issue Price:
 NPR 300/share for the project affected local
 NPR 400/share for general public
 Initial Offering date: July 29, 2018
 Issue Undersubscribed
Revised Issue Price:
 NPR 200/share for the project affected
local
 NPR 300/share for general public
 Initial Offering date: February 18, 2019
 Issue fully subscribed
Secondary Markets Transaction
March 24, 2019 (First Week of Transaction)
Open range: NPR 162 – NPR 485
Open Price: NPR 464
Close: NPR 333
Loss of 28.3% in a week
1st week of June 2019 (70 days from trading)
Open Price: NPR 665
Close Price: NPR 678
Gain of 126% from the IPO price
Gain of 46% from the open price
Gain of 99.69% from 1st week low

4. A Case Study – Shivam Cement
How to address such price movements in favor of the Issuer?
How to bring such Non-Mandatory scripts to the market?

5. Why go Public?
Why do I offer the shares of my company to a large pool of
investors?
Large pool of investors allow access to vast source of Capital
Going Public requires public disclosure and participation in
the board
Public disclosures reinforce transparency that support public
confidence and hence high firm value

6. Why go Public?
Requires to be more transparent and answerable to
shareholders and potential investors
Good governance and right management practices -
supports higher price multiple and firm value
It is a cost to the company
As management costs, good corporate governance is for long
term sustainability compensated by higher market valuation

7. Public Listing makes Exceptional Value
Gain Possible

8. Public Listing makes Exceptional Value
Gain Possible

9. Public Listing makes Exceptional Value
Gain Possible
4,400
26,752 26,312
31,768
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2074-75 2075-76 2076-77 2077-78
AmountinNPRmillion
Market Capitalization of Shivam Cement

10. Why go Public?
Internationally going Public is a
celebrated event for a Corporation
It is like a Litmus test of the company
and its management by the Market
It is an efficient way of realizing Value
of the Firm
It is used as an incentive model for the
management team

11. Pricing in IPO – International Practice
• Fixed Price Method – Par Value vs. Premium Value
• Free Pricing Method
– Auction Process
• Discriminatory Auction
• Dutch Auction
– Book Building Process

12. Pricing in Public Offerings – Nepal
Perspective
• Fixed Pricing Method
– Par Value
– Premium Pricing (IPO of companies satisfying regulation of
SEBON, FPO)
• Auction
– Discriminatory Auction (Secondary offerings: SCBNL, NTC,
Nabil Bank, NIBL etc.; auction of unsold shares from Rights
Offerings)
– Dutch Auction

13. A Case for Free Pricing IPO in Nepal
0%
10%
20%
30%
40%
50%
60%
Bank Dev Bank FinComp MicroFin Life Ins Non-Life
Ins
Manu &
Proces
Hotel Hydro Trading Others
Sectoral Holding in NEPSE
Paid Up Capital Market Cap
Out of 212 listed companies 70% are BFIs
BFIs represent 78% of listed companies in terms of Par Value 76%
in terms of Market Cap

14. A Case for Free Pricing IPO in Nepal
• Capital Markets in Nepal
– Highly sensitive to BFIs
– Investors are deprived of investment opportunities in
other economic sectors
– Other sectors of the economy are not able to benefit from
the Capital Markets

15. Is Market Ready for Free Pricing?
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Capital Raised via Primary Market
IPO Ordinary Shares
Right Share
FPO
Debenture
Mutual Funds
Total
NPRmillions
Around NPR 50 billion of fresh Capital injected annually for last 3 years
Annual investment in public offerings have been growing by 13% CAGR
since last 10 years

16. Is Market Ready for Free Pricing?
11,787 6,665
10,279
22,049
77,292
65,332
163,958
205,023
121,391
110,075
150,039
-
50,000
100,000
150,000
200,000
250,000
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
NPRinmillion
NEPSE Annual Turnover
Around NPR 150 billion worth of shares traded in NEPSE in FY 2019/20.
Around NPR 76 billion has been traded in 2 months this Fiscal Year.
Annual turnovers have been growing by 30% CAGR since last 10 years

17. Is Market Ready for Free Pricing?
76 licensed DP
Beneficiary Accounts : 2,025,692
50 Stock Broker Company
337,360 active broker accounts
120,499 active online broker account
30 Merchant Bankers
17 Mutual Funds 2 Credit Rating Companies

18. Is Market Ready for Free Pricing?
Land
Shares
Gold

19. Parallel Developments
Equal Priority to...
Domestic
Investments
Foreign
Investments

20. FREE Pricing in IPO

21. Who will be the Beneficiaries?
• Promoter/Entrepreneur/Company
– Issuer will be able to raise capital from the market at
perceived fair price of its share
– Market value reflects the value of the firm
– Builds a brand personality on its direct or indirect
customers
– Brand awareness
As of July 2020, 33 hydropower companies have raised
around NPR 19 Bn from the market

22. Who will be the Beneficiaries?
• General Investors
– Have option to invest in good companies at fair price.
– Will be participating in a market that represents overall
growth opportunities of the economy.
– Will have choice to make informed and educated decision
of investments
– Will have well diverse sectors to choose from both to
invest and to mitigate risks

23. Who will be the Beneficiaries?
• Market Intermediaries
– Market Intermediaries like merchant bankers, brokers,
media benefit as the market would grow and be more
mature
– The playing ground for them will be bigger
– The market would require professionals and skill based
human resources
– Human capital will be valued in the Capital Markets

24. Who will be the Beneficiaries?
• Regulators
– Regulators would achieve their goals of making the Capital
Markets function as per its objective
– Achieving the goal of a fair flow of capital from the source
to the needed enterprises would be the success for
regulators
– A scarce capital would find a deserving users of the
capital for the economic growth and exceptional return
on the capital employed

25. Strengthening Market Ecosystem
Stakeholders
Issuing
Company/
Entrepreneur
SEBON
(Regulators)
Qualified
Institutional
Investors
Retails
Investors
NEPSE/CDSC
(Trading
Platform)
Merchant
Bankers
(Investment
Bankers)
Brokers/Credit
Ratings
Media

26. Developing Ecosystem
• Regulators (Ministry of Finance)
– Recognizing the role of broader Capital
Markets in the economic development
– Policy to promote market development
for large number of investors participation
• Long term/short term investors
– Promote market intermediaries
• Capacity - Role - Responsibility
– Promote participation of real sector
economies in the market

27. Developing Ecosystem
• Regulators (Securities Board of Nepal)
– Facilitation, Supervision and Enforcement
– Ensure businesses can be run as viable
entities in the market ecosystem
– Regulate listed companies
– Collaboration with other regulatory
authorities
– Spokesperson for the Capital Markets
Development
• Markets should be enduring for
entrepreneur, investors and professionals

28. Developing Ecosystem
• Real Sector Companies
– Capital Markets as a source of long
term fund
• For continuous growth
– Capital Markets as a recognized
valuation platform
– Corporate Governance
– Regulatory disclosures
– Communication with Investors

29. Developing Ecosystem
• Market Intermediaries
– Professionalism and
responsibility in service delivery
– Educating investors
– Continuous capacity building
– Enhancing business practices
– Innovation and Technological
advancement

30. Developing Ecosystem
• Investors
– Being aware of Investment
opportunities
– Developing Investment habit as a
long term, periodic investments and
plan for compounding growth
– Follow invested companies
– Demand regulatory disclosures
– Co-educate

31. Preparing for Fallbacks – Free Pricing
• Chances of Market Manipulation
• Shift from offering shares at NPR 100
par to discovered premium price
– Is it a loss to general investors?
• A longer Issue Management Process
• A costlier affairs
• Require qualified Human Resources –
Transformed Market Intermediaries

32. Preparing for Fallbacks – Free Pricing
• Synchronized Financial Markets and Capital
Markets
• Technological Advancement
• Effective monitoring of companies before
and after the Public Offerings
• Effective supervision and regulatory
amendments in response to market growth
and market changes
• Apt regulatory provision for continuous
creation of a long term capital

33. “Capitalism depends upon the ability to produce
and use Capital efficiently. It is the Capital that is
the source of increasing productivity and
therefore the wealth of nations”
The Mystery of Capital, Hernando De Soto

34. Thank You !