How is the IPO Opening Range Determined in NEPSE for the First Transaction?

The IPO craze in NEPSE is at its all-time high. According to CDS and Clearing Limited, there are a total of 27,75,289 Demat accounts in Nepal. This is the reason why the IPO issues in Nepal are getting a record number of applicants. Just for your information, these are all the helpful links to assist you to invest in an IPO:

1) Everything you need to know about an IPO.
2) The essence of investing in the stock market.
3) How to open a Demat account to invest in an IPO
4) How to log into Meroshare account to apply for IPOs online.

A company issues an IPO to the general public to raise money for its further ventures. After an IPO issue closes, allotment is done. If investors have applied for more shares than the amount open to the public, a lottery is done.

After this allotment process is complete, the issue manager sends an application to NEPSE requesting for the shares to be listed. The shares have to be listed in NEPSE for trading, i.e. for the investors to buy and sell the shares. The process of issuing an IPO happens in the primary market. After the shares are listed, they are traded in the stock exchange, which is also called the secondary market. What you should know is that the secondary market is the “real” stock market, a picture of which you have in your mind. If you have heard about stock dividends, profit, right shares, and stock charts, all these happen in the secondary market.

The stock market is governed by supply and demand, i.e. by investor sentiment. While writing this article, Machhapuchchhre Bank Limited (MBL) has a stock price of Rs. 322. This is completely determined by the investors. NEPSE, or SEBON, or the Nepal Rastra Bank has no say over it.

However, NEPSE has control in the initial listing

NEPSE has a say when the IPO shares are first listed in NEPSE. In international markets, IPOs are not offered at Rs. 100 per share. Before the public issuance of the stock, an investment bank is hired to determine the value of the company and its shares before they are listed on an exchange. Thus, the pricing happens automatically from the very beginning, i.e. from the time when you apply for the IPO.

However, NEPSE wants companies to issue an IPO at Rs. 100 (unless companies qualify for a premium price.) This is done to promote investment in our baby stock exchange. This is also why most IPOs are profitable immediately after they are listed for trading.

How is the Opening Range Determined?

The opening range is the price range at which the IPO shares of a company must trade for the first transaction. NEPSE looks at the book value per share (BVPS) of a company. The book value per share itself is the lower limit of the opening range. The upper limit is three times the book value per share.

Book value per share (BVPS) takes the ratio of a firm’s common equity divided by its number of shares outstanding. Book value of equity per share effectively indicates a firm’s net asset value (total assets – total liabilities) on a per-share basis.

Thus, if a company has a book value per share of Rs. 100, it must trade for the first time in NEPSE in the price range of Rs. 100 to Rs. 300. Note that after the first transaction, investors are free to take the price wherever they like, based on supply and demand.

I have studied and noted the average profit of the past IPO in this article. The article compares the profit immediately after listing, a week after listing, a year after listing, etc. Hope it provides some insights for a beginner.

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