SEBON's New IPO Directive Sparks Outrage in Nepal's Hydropower Sector

The Securities Board of Nepal (SEBON) has ignited a significant controversy within the nation's vital energy sector following the public release of its draft directive concerning public share issuance (IPOs). The proposed 'Directive on General Eligibility for Public Issuance, 2083' has drawn sharp criticism from private energy producers, with the Independent Power Producers' Association, Nepal (IPPAN), issuing a stern warning that the new rules could severely cripple the hydropower sector and effectively block its access to capital from the secondary market.

Mohan Kumar Dangi, President of IPPAN, has vehemently accused SEBON of introducing the draft with the explicit intent to halt hydropower IPOs. Dangi argues that the regulatory body has failed to grasp the unique financial structure of hydropower projects and the fundamental principles of 'project financing,' which are distinct from traditional manufacturing or service industries. This lack of understanding, he contends, has led to a set of impractical and damaging conditions.

At the heart of the dispute are several stringent criteria proposed in the draft directive. Section 16 mandates that the net worth per share of any organized institution must not fall below its par value of Rs. 100. Furthermore, Sections 6 and 7 stipulate that companies must be operational, generating income, and possess audited financial statements to be eligible for an IPO. These conditions, while potentially suitable for mature, revenue-generating businesses, pose an insurmountable hurdle for hydropower projects.

Hydropower projects are inherently capital-intensive, long-gestation infrastructure ventures. During their extensive construction phase, they do not generate income. Instead, they accumulate significant debt interest and construction costs, which naturally cause their net worth per share to dip below Rs. 100 in the initial years. By imposing a blanket rule that 'net worth must not be less than par value' and 'shares can only be issued after commercial operation,' SEBON's directive effectively seals off the primary route for hydropower companies to raise crucial equity capital during their construction phase. This is precisely when they need funds the most to complete their projects.

President Dangi expressed his profound frustration, stating, "Hydropower needs money during the project construction phase. Once the project is built, electricity sales generate revenue, so why would they need money then? Even a fool understands that!" He further lambasted SEBON's current stance, calling it a "drama" designed to prevent hydropower companies from issuing IPOs, hinting at a potential conspiracy against the sector.

In a defiant challenge to SEBON's perceived overreach, Dangi warned that if the regulator insists on implementing such restrictive policies, IPPAN would advocate for the abolition of the mandatory provision requiring public issuance of shares to the general public. He argued that while the Securities Board's regulations currently mandate 20 percent share issuance to the general public and locals, the new directive contradicts this. "If this continues, we will not issue shares to the general public," Dangi declared. He suggested that if the 10 percent allocation to project-affected locals – a necessity to prevent project obstruction – is maintained, the requirement for general public issuance should be waived. "If there's profit, we'll build projects; if not, we won't, we'll abandon them," he asserted, highlighting the gravity of the situation.

Dangi also recalled a previous instance where IPPAN had cooperated with SEBON to curb market irregularities. To prevent speculative trading in hydropower shares, IPPAN had agreed to a stricter rule allowing IPOs only after 65 percent physical progress of a project, an increase from the previous 50 percent. "We ourselves signed off on the 65 percent completion rule to stop market players from manipulating share prices," he recounted. However, he feels betrayed, stating that instead of penalizing market manipulators, SEBON has chosen to "strangle the entire energy sector" by demanding a net worth of 100 only after production commences.

Despite informal assurances from SEBON that a separate 'sector-specific directive' for the energy sector might be introduced, Dangi remains deeply skeptical. He cited past unfulfilled promises, such as the government's five-year delay in issuing power trade licenses to the private sector. "We receive many assurances in this country," he remarked, emphasizing that any policy affecting the energy sector must be developed through direct consultation and presented to them for review. "No one will be swayed by mere assurances anymore," he added.

The implications of this directive extend far beyond individual companies. Nepal has an ambitious target of generating 28,500 megawatts of electricity by 2035, requiring an investment exceeding NPR 46 trillion. If the capital market's door for equity collection is effectively shut, hundreds of ongoing and pipeline projects, predominantly driven by the private sector, face the imminent risk of financial collapse. This would not only jeopardize Nepal's energy security but also derail its broader economic development goals.

SEBON's proposed directive, by failing to differentiate between the financial models of manufacturing industries and greenfield infrastructure projects like hydropower, threatens to completely halt the issuance of shares by hydropower companies. This could deliver a severe blow to the nation's overall energy development, placing Nepal at a critical juncture where regulatory oversight must be balanced with a nuanced understanding of sector-specific realities to foster, rather than impede, progress.