SEBON Tightens IPO Rules, Seeks Suggestions Within Seven Days on New Directive Draft

Kathmandu. The Securities Board of Nepal (SEBON) has proposed detailed eligibility criteria on financial condition, institutional governance, management and use of funds for companies seeking to float an initial public offering (IPO). The draft of the 'Directive on General Eligibility for Public Offering, 2083' prepared by the board seeks suggestions within seven days.

According to the draft, the net worth per share of a company floating an IPO cannot be less than the paid-up value. The board has proposed to separately determine additional minimum net asset criteria for different industries.

Once the draft comes into force, an institution seeking a public offering must have operated its business according to its main objective and completed audits and annual general meetings. It is proposed that the entity must have obtained necessary licenses and approvals, and must have had a clear plan for utilizing the IPO proceeds approved by the general assembly.

Before applying, the company must publish audited financial statements of the last three fiscal years on its own website and that of the issue and sales manager. The draft proposes that the company's website must also carry the annual report, business prospects and challenges, future plans, qualifications and experience of directors and the chief executive officer, along with their investment amount and percentage.

After applying for an IPO, the company cannot change its capital structure without the board's approval, according to the draft. The directive, however, has not fixed a minimum period for operating the business. The board may determine such a period sector-wise based on the nature of the industry, risk and capital structure.

Independent director and four key officials mandatory

An institution seeking a public offering must have appointed an independent director. It is proposed that the company must have at least four key officials: chief executive officer, chief financial officer, company secretary and compliance officer.

As required, structures such as an audit committee, risk management committee, nomination and remuneration committee and project monitoring committee must be formed. The draft states that the company must also have effective internal control, risk management, internal audit, business continuity and disaster recovery plans.

The board will conduct a 'fit and proper' test of founder shareholders, directors and the chief executive officer. A person sentenced for financial fraud, corruption, money laundering or other serious economic offenses cannot be eligible until three years have passed since serving the sentence. In the case of a person released from the blacklist, at least six months must have passed.

IPO funds in a separate bank account

All funds raised from the public offering must be deposited by the company in a separate bank account. The funds can be used only for the purpose approved in the prospectus. It is proposed to prohibit the use of funds for regular operating expenses, unrelated investments or purposes not approved by the board.

The board of directors must review the use of funds at every quarterly meeting. The company must submit quarterly and annual reports to the board until the funds are fully utilized, and must obtain prior approval from the board to change the fund utilization plan.

From sales manager to engineer held responsible

The draft holds the issue and sales manager, auditor, legal advisor and, as required, an independent engineer and other experts responsible for the veracity and testing of the details.

In particular, the technical condition, construction progress, cost and operational readiness of hydropower, energy and infrastructure projects must be tested by an independent engineer. It is proposed that records related to due diligence be preserved for at least 10 years.

IPO can be cancelled for misleading details

If a company hides material facts, provides false or misleading details, fails to meet minimum eligibility or if the fund utilization plan is not credible, the board may reject the IPO application.

The board has been proposed to have the authority to conduct on-site inspections, special and forensic audits, information technology tests and project site inspections. If serious violations are proven, the public offering can be suspended or cancelled, financial penalties imposed, and responsible professional institutions barred from IPO-related work for a certain period.

The directive is currently in draft form. It will be finalized only after approval by the board and after suggestions are received within the period specified by the board.