Book Building for IPO Finally Explained for Nepal’s Share Market

Until now, an IPO guaranteed almost-sure profit in Nepal.

Basically, a company needs more funds to grow its business.

If the founders do not have enough money, they will request the public to invest their money in the company.

This has to be done systematically by issuing an IPO.

Read this article to learn about the stock market in simpler words. Read this article to learn more about an Initial Public Offering (IPO).

No matter the company, the rules of the Nepalese Stock Exchange are such that each company should issue an IPO at Rs. 100 per share.

This means that the company might be worth more than Rs. 100 per share, but it must issue the IPO at Rs. 100.

This automatically means that those who buy at Rs. 100 will be profitable once the shares are traded in NEPSE because investors will ultimately raise the price to its real value (which is usually higher than Rs. 100.)

However, there have been talks of introducing the book-building process lately. This might reduce the profits made in IPOs.

Basically, book building allows companies to issue an IPO at a higher, premium price, which is often more than Rs. 100 per unit.

Book Building Explained

Book building is the process by which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered.

An underwriter, normally an investment bank, builds a book by inviting institutional investors (such as fund managers and others) to submit bids for the number of shares and the price(s) they would be willing to pay for them.

Let me translate that to English:

Until now, IPOs were offered at a flat Rs. 100 per share.

This meant that investors were immediately in a profit when these shares were listed in NEPSE and the supply-demand mechanism took the price near its intrinsic value.

From now on, NEPSE will follow a bit more scientific approach to valuing IPOs.

Now, institutional investors will be able to value the price before the IPO is issued to the general public. First, the company that proposes to issue its IPO will quote a price per share.

Now, generally, people and companies are biased. They will want to keep a higher quotation since each extra rupee per share increases the profitability of the company.

However, institutional investors are there to keep things in check.

They will analyze every detail about the company and determine if the quoted price is justified. Only then is the company allowed to issue an IPO at that price to the general public.

This is the stepwise process:

  1. The issuing company appoints an issue manager/ book runner.
  2. The issuing company and the issue manager decide upon a tentative quotation price and quantity of shares to be issued.
  3. A draft prospectus is prepared as per SEBON’s instructions. SEBON is the regulator of Nepal’s Securities Market.
  4. This prospectus includes a lot of important things, like the method of valuation, bases, etc.
  5. Issuing company organizes a discussion program (also called a road show) among qualified institutional investors. This is done in coordination with the issue manager.

Benefits of Book Building Process for IPO in Nepal’s Share Market

Book Building System is the process of price discovery in which a company hires a merchant bank to decide a price range at which shares are to be issued instead of a specific price. 

The merchant bank is known as an underwriter or a book runner. 

The bank is responsible to research the issuing company and come up with a price range for its IPO shares.

Once the price range is decided, the merchant bank then prepares a prospectus calling out investors to apply the shares.

Book Building System of price discovery mechanism dominates the IPO and FPO issuance worldwide.

Among several other IPO issuance mechanisms such as fixed price, tender, auction, public offer methods, Book Building System is considered to be the most efficient method.

Several developed countries have adopted the Book Building System.

This method helps to raise a large amount of capital, gain price-relevant information from potential buyers, bring in higher net revenue, provide riskier projects and access to the stock market, and liquidity to investors.

The mechanism also broadens the functions of institutional investors as it broadens the scope of services before and after IPO issuance.

Besides this, the mechanism encourages local and international companies to float IPOs as it involves a fair process.

GoN’s one-year-old policy to introduce more manufacturing companies in the stock market has been a failure as most of the manufacturing and tech companies are hesitant to enter the stock market.

So, the book-building process might be a helping hand to attain this goal as companies will no more be forced to issue shares at par value.

Potential IPOs by Book Building Process

  1. Reliance Spinning Mills Pvt. Ltd.

Reliance Spinning Mills Pvt. Ltd. has proposed to issue an IPO for 14,60,000 shares via the book building method. The company has appointed Global IME Capital as its issue manager.

The company manufactures Polyester, Viscous, Acrylic yarn of international standard that is then exported worldwide, primarily to India and Turkey.

2. Sarbottam Cement Limited

Sarbottam Cement Limited had an agenda to discuss IPO issuance via the Book Building process in its latest AGM (2nd AGM held on Magh 06, 2077, i.e. January 19, 2021. )

Update: Sarbottam Cement had been preparing to issue its own IPO via the book building method. However, note that the procedure has been halted. According to the clause of SEBON, the capital market regulator, companies should at least have one operational fiscal year after being converted to a public limited company. This is why the IPO process can’t continue, for now, says Paras Mani Dhakal, CEO of issue manager Global IME Capital.

Another Update: The IPO issuance of Sarbottam Cement has been controversial, as the heads of NEPSE and SEBON have had to resign/be fired for illicit obtaining of shares of the company.

Yet Another Update: When I contacted the issue manager Global IME Capital on behalf of Sharesansar today (January 04, 2022), the company CEO Paras Mani Dhakal stated that there has been no progress on the IPO procedure of the cement manufacturer. The issuer company hasn’t signed the agreement with NEPSE that would allow it to take the procedure ahead. The representative sounded as if the company’s IPO issue had been in the dark, and had little hopes of materializing any time soon.

Stock market veterans also claim that this event has unfortunately questioned the viability and credibility of the Book Building process in lack of proper regulation.

3. Arghakhanchi Cement Limited

Arghakhanchi Cement Limited is one of the largest manufacturers of OPC and PPC cement through a single production plant in the country. The company has called its 23rd AGM on Magh 05, i.e. January 19, 2022. Apart from the usual agendas, there is a special agenda to discuss the issuance of an IPO via the book building method.

Important Note:

Companies have to meet certain criteria to be eligible to have their shares listed via the Book Building process.

Thus, the process will surely take a long time to be implemented for all companies. And much to our delight, many upcoming IPOs will still be issued at Rs. 100 per share.

Institutional Investors in Nepal that can Participate in Validation of IPO Price Quotation

There were a total of 46 institutional investors initially in Nepal eligible for the book-building process. SEBON added 18 more investors on Magh 20 this year. Now, the board has added 10 more institutional investors on Falgun 25.

Thus, there are a total of 74 institutional investors in Nepal that can participate in the validation of IPO price quotations.

This is the entire list of eligible institutional investors:

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