SEBON moves to shut the 'premium' loophole, telling IPO hopefuls to earn their net worth

KATHMANDU — The Securities Board of Nepal (SEBON) has tightened the gate to the country's primary market, signalling that it will no longer treat money raised through share premiums as proof that a company is fit to sell shares to the public. Under a freshly issued framework, firms that lifted their per-share net worth above Rs 90 by folding in premium proceeds now face a fresh round of scrutiny, with several of them sent back for re-valuation.

The instrument behind the shift is the board's new "Standards for the Review of Financial Statements Submitted for Initial Public Offerings, 2082." In plain terms, the rule strips the share-premium amount out of the net-worth calculation that companies must satisfy to win IPO clearance. Where a firm's headline net worth had been propped up by premium capital, that cushion no longer counts — and any company that relied on it to clear the threshold is being reassessed.

To understand why this matters, it helps to recall where the Rs 90 figure came from. It is not written into the Securities Act, nor does it trace to any recognised accounting standard. It entered Nepal's capital market in late 2023, when Parliament's Public Accounts Committee directed SEBON to stop approving public issues from companies whose net worth per share fell below Rs 90. The intent was protective — to keep financially frail firms from raising money off ordinary investors — but the threshold has since become one of the most contested fixtures in the market, blamed for a years-long pipeline jam even as the regulator has defended it as a basic safeguard.

What the new standard targets is the workaround that grew up around that bar. As the IPO market expanded over the past few years, so did pre-IPO dealing, in which companies preparing to go public sold shares to a narrow pool of investors at prices well above face value. Real-sector firms in particular — cable car operators, hydropower developers, investment companies and cement makers among them — saw brisk pre-IPO trade at a premium, and additional premium was mopped up through auctions. Each rupee of that premium flowed onto the balance sheet as equity, lifting the company's net worth and, conveniently, easing it over the financial benchmarks an IPO application has to meet.

That is precisely the manoeuvre SEBON has now decided to look through. In the board's reading, a net worth swollen by premium collection does not describe a company that is performing; it describes a company that has gathered capital. The two are not the same, and the new policy leans hard on the difference — directing reviewers to weigh operating profit, retained earnings and reserve funds far more heavily than capital pumped in ahead of the offering.

Tola Kanta Neupane, a joint spokesperson for SEBON, framed the change bluntly: parking money in a premium account mechanically raises net worth, and the board has seen cases where that arithmetic alone pushed a firm's per-share figure past Rs 90 and into eligibility. From now on, he indicated, that will not be enough. The increase in net worth has to come from the business itself; where it has been manufactured by anything other than genuine operations, approval will not follow.

Companies already waiting in line are not exempt. Neupane signalled that pipeline firms carrying premium balances must also go through re-valuation, this time routed through merchant banks. He drew a careful distinction that goes to the heart of the dispute: a company may keep its books impeccably under the Nepal Financial Reporting Standards (NFRS), and may show — truthfully — that the premium money arrived and that net worth duly cleared the bar. Under accounting rules, none of that is fictional. But for the narrow purpose of granting an IPO, he stressed, the board will only credit net worth that the company built by trading and earning, not by raising.

The practical consequence is that a queue already groaning under its own weight may slow further. By recent count, more than 80 companies are stacked in SEBON's IPO pipeline, seeking to raise in the region of Rs 55 billion, with hydropower the single largest bloc. A number of those applicants had returned to the queue specifically after their net worth per share crossed Rs 90 — the very kind of crossing the new standard now invites the regulator to interrogate. Insiders expect that recomputing net worth without the premium prop could open a visible gap for some of them, and a few may find themselves back below the line they had only just cleared.

Premium accounting is not the only thing now drawing the board's eye. The standard flags a cluster of warning signs for closer review: sales booked largely as receivables still to be collected, net worth that thins out once contingent liabilities are properly adjusted, heavy dealing with related parties, financial ratios that improved chiefly because of a change in accounting policy, and profits resting on non-operating income rather than core business. SEBON has also layered sector-specific lenses over the process, singling out manufacturing, hotels and tourism, hydropower and energy, and investment companies for additional examination tuned to the particular risks each carries. Taken together, the message is that an IPO file will no longer be cleared on the strength of tidy ratios alone; the regulator wants a read on the underlying business.

What it means: substance over form, and a familiar game of cat and mouse

Strip away the technical language and the new standard amounts to a single principle that securities regulators elsewhere would recognise instantly — substance over form. A share premium is paid-in capital: it tells you investors were willing to pay up, not that the enterprise turns a profit. Retained earnings and reserves, by contrast, are what a business keeps after actually operating. By privileging the latter, SEBON is effectively grading the quality of a company's net worth rather than its size, and refusing to let a one-off capital injection stand in for a track record. As a matter of investor protection, the logic is hard to fault: the danger the board is guarding against is a company that raises money cheaply from a small circle at inflated prices, dresses up its balance sheet, and then turns to the retail public to take the shares off its hands.

Yet the move is best understood as the latest turn in a contest that has been running for two years. The PAC set a hard net-worth floor; companies, predictably, found a way over it by raising pre-IPO premium that lifted equity without lifting earnings; and SEBON is now countering by disqualifying exactly that kind of lift. Each side has adapted to the last move. That is the recurring problem with a single numerical gate — it invites financial engineering aimed at the number rather than at the health the number is meant to signal. The new standard is a more intelligent screen than a blunt Rs 90 cut-off, but it is being bolted onto a foundation that critics still regard as legally shaky and economically costly, given how long the pipeline has been stalled.

There is a second tension the policy does not resolve. The pre-IPO market is itself the pressure point here: the boom in private placements and premium sales created the very inflation the regulator now distrusts at the IPO stage. Tightening at the point of public issuance addresses the symptom, but the build-up of premium-heavy balance sheets happens upstream, in a pre-IPO space that remains comparatively lightly policed. If the concern is that net worth is being manufactured rather than earned, the manufacturing is taking place well before the IPO file lands on SEBON's desk.

For now, the immediate effect is concentrated on a specific set of firms — those whose climb above Rs 90 owes more to premium than to performance. They will have to make their case again, through merchant-bank re-valuation, and demonstrate that the business behind the numbers can stand on its own. For the wider market, the standard sharpens a question that has hovered over Nepal's primary market for some time: whether the right way to protect retail investors is to keep refining a net-worth threshold, or to move toward disclosure-led regulation that lets investors price risk for themselves. SEBON's answer, for the moment, is to demand that companies prove their worth the slow way — by earning it — and to treat a premium-fattened balance sheet as a reason to look harder, not a reason to wave the offering through.