Nepal IPO and Promoter Share Concerns: Is the Capital Market Losing Its Purpose?

Nepal’s capital market has expanded significantly in recent years, with new companies entering the stock exchange through Initial Public Offerings (IPOs). However, the rapid growth of IPOs has also raised an important question: Are some companies entering the capital market primarily to build sustainable businesses, or is the IPO itself becoming the business model?

This question deserves serious discussion among investors, regulators, promoters and policymakers.

The Post-2020 IPO Question

There is growing criticism among market participants that a significant number of companies listed after 2020 have struggled to demonstrate the profitability and dividend-paying capacity that investors might expect from mature businesses.

A company’s financial performance can naturally change over time. Business cycles, interest rates, operating costs, project delays, competition and economic conditions can all affect profitability.

However, when a large number of recently listed companies struggle to generate sustainable earnings, investors are justified in asking whether the quality of IPO candidates and the underlying business models are being adequately examined.

The Securities Board of Nepal (SEBON) maintains official records of approved IPOs and public issues, providing investors with a basis for examining the history and characteristics of listed companies.

The bigger issue, therefore, is not simply how many companies pay dividends.

The bigger question is:

What kind of businesses should be allowed to access public capital, and what responsibilities should promoters have after receiving that capital?

Is Financial Engineering Becoming a Concern?

One of the strongest criticisms emerging from the market is the use of aggressive financial structuring before an IPO.

Financial engineering itself is not automatically improper. Companies can legitimately restructure their capital, improve operational efficiency, consolidate businesses or reorganize their balance sheets.

The concern arises when financial presentation becomes more important than the underlying business.

Investors ultimately need to know:

• Is the company generating sustainable operating income?
• Is the business model commercially viable?
• Can the company generate cash flow?
• How much debt does it carry?
• What are its future capital requirements?
• What are the promoter commitments?
• How will the IPO proceeds actually be used?
• Can the company create value for both promoters and public shareholders?

An attractive prospectus should not substitute for a strong underlying business.

The 85:15 Capital Question

Consider a hypothetical company with Rs. 1 billion in paid-up capital, where promoters contribute Rs. 850 million and the public contributes Rs. 150 million through an IPO.

This naturally raises a question among investors:

If promoters were able to mobilize Rs. 850 million, why couldn't the company raise the remaining Rs. 150 million from its promoters?

There can be perfectly legitimate reasons for offering shares to the public. Public participation can improve transparency, broaden ownership, create price discovery and provide access to additional capital.

But the public issue should also have a clear economic purpose.

The objective of an IPO should not simply be to transfer a portion of ownership to the public and eventually create an opportunity for existing shareholders to monetize their holdings.

The capital market should be a mechanism for capital formation, not merely a mechanism for liquidity extraction.

Promoter Risk Deserves a Reward — But So Does Public Capital

Promoters take risks when establishing a company.

They invest capital, develop projects, build management teams and face uncertainty before the company becomes successful.

Therefore, promoters should receive an appropriate return for the risks they take.

But promoter reward should ideally come from building a successful business, increasing profitability, expanding operations and creating long-term shareholder value.

The concern arises when the dominant incentive becomes the ability to raise public money, list the company, wait for applicable restrictions to expire and then sell shares into the secondary market.

Nepal's securities framework contains specific rules concerning public issues, promoter shares and conversion of promoter shares into public shares. SEBON also publishes information on promoter-share conversions.

This makes transparency around promoter ownership and subsequent share transactions especially important for investors.

From Business Houses to IPO-Oriented Ventures?

Nepal historically produced major business groups involved in manufacturing, trading, banking, insurance, healthcare, education, consumer goods and other productive activities.

Companies involved in steel, textiles, fast-moving consumer goods, imports, exports and industrial production represented a traditional model of entrepreneurship: build a business first and access the capital market as the business grows.

Today, investors are increasingly discussing a different model.

A company is established around a project such as:

• A hotel
• A cable car
• A religious or tourism project
• An investment company
• An infrastructure project
• A specialized service business

The company subsequently seeks public participation through an IPO.

There is nothing inherently wrong with these sectors. Nepal needs investment in tourism, infrastructure, energy and services.

The important question is whether the business itself remains the primary objective.

The IPO Should Not Become a Cash Crop

An IPO can provide a company with long-term capital.

But if a pattern develops in which one company is established, listed, promoter holdings later become transferable under applicable rules, shares are sold, capital is extracted from the market and another company is subsequently established for another IPO, investors may reasonably question whether the process is creating productive capital or repeatedly recycling market liquidity.

This is why the phrase “IPO as a cash crop” resonates with some market observers.

The capital market should instead encourage a cycle of:

Entrepreneurship → Business Growth → IPO → Capital Formation → Expansion → Profitability → Shareholder Value

rather than:

Company Formation → IPO → Listing → Promoter Liquidity → New Company → Another IPO

The distinction is fundamental.

What About Corporate Governance?

Promoter ownership is not necessarily a problem.

In fact, strong promoter ownership can align management with long-term shareholders.

The question is what happens when promoters no longer have a meaningful long-term commitment to the company.

If a company's founders and major shareholders gradually reduce their economic interest, investors may naturally ask:

• Who will be responsible for the company's long-term performance?
• Who will protect minority shareholders?
• What incentives remain for management?
• How strong are the internal controls?
• Is the board sufficiently independent?
• Are related-party transactions properly disclosed?
• Is capital being deployed efficiently?

Good corporate governance requires more than simply complying with listing requirements.

It requires long-term accountability.

What Investors Should Examine Before Buying an IPO

Investors should not evaluate an IPO simply because it is new or because the company operates in a fashionable sector.

Before investing, examine:

1. Profitability

Look beyond one profitable year.

Study the company's earnings history, margins and return on equity.

2. Cash Flow

Accounting profit and actual cash generation can be very different.

Operating cash flow deserves particular attention.

3. Promoter Background

Investigate who the promoters are, their previous businesses and their track record.

4. Promoter Shareholding

Understand how much capital promoters have invested and what restrictions apply to their shares.

5. Use of IPO Proceeds

Ask where the money raised from the public will actually go.

6. Debt

A company with substantial debt may face significant financial pressure even when accounting profits appear positive.

7. Valuation

An attractive company can still become an unattractive investment if its valuation is excessive.

8. Dividend Capacity

Dividend history and future dividend capacity should be assessed alongside earnings, cash flow and capital requirements.

9. Corporate Governance

Review board composition, related-party transactions, disclosures and management accountability.

10. Future Capital Requirements

A company that repeatedly needs fresh capital may eventually dilute existing shareholders.

The NRM, ENL and HATHY Debate

Recent discussions surrounding companies such as NRM, ENL and HATHY have further intensified conversations among Nepalese investors about promoter holdings, public shareholders, liquidity and the relationship between promoters and listed companies.

However, individual companies should be evaluated using their respective financial statements, prospectuses, regulatory disclosures and shareholding information rather than assuming that the same explanation applies to every listed company.

The broader debate is more important than any single company.

What should be the responsibility of a promoter after taking a company public?

That question deserves a clear answer from the entire capital-market ecosystem.

Nepal Needs Capital Formation, Not Just More Listings

Nepal does not necessarily need thousands of listed companies merely to increase the size of the stock exchange.

It needs companies capable of:

• Creating employment
• Generating sustainable profits
• Producing goods and services
• Increasing productivity
• Expanding exports
• Developing infrastructure
• Paying taxes
• Creating long-term shareholder value

The capital market should connect savings with productive investment.

If public money is raised through IPOs, investors should ultimately be able to see how that capital contributes to business expansion and economic activity.

Regulators Also Have a Critical Role

The responsibility does not belong only to promoters.

Regulators, issue managers, auditors, rating agencies, directors, institutional investors and retail investors all have roles to play.

SEBON currently publishes IPO approvals, public-issue data, promoter-share conversions and other securities-market information.

Greater transparency around:

• promoter holdings,
• lock-in periods,
• financial projections,
• use of IPO proceeds,
• related-party transactions,
• promoter transactions,
• profitability,
• cash flows,
• and post-IPO performance

could help investors make more informed decisions.

The Real Question for Nepal's Capital Market

The debate should not be about whether promoters deserve to make money.

They do.

The debate should be about how that wealth is created.

If promoters create successful companies, increase productivity, employ people, generate profits and deliver long-term shareholder value, their success can also become the success of public investors.

But if the primary objective becomes repeatedly accessing public liquidity through new listings, then the market needs to ask whether its capital-allocation mechanism is working as intended.

Nepal's capital market is ultimately built on public confidence.

Once investors begin to believe that an IPO is primarily an exit opportunity rather than an opportunity to participate in a growing business, that confidence can weaken.

The solution is not simply to stop IPOs.

The solution is to build a system where quality businesses, responsible promoters, strong corporate governance and informed investors reinforce one another.

Final Thought

What Nepal's stock market is experiencing today should be viewed not only as a short-term market problem but also as a consequence of how capital has been raised, allocated and managed over the years.

The lesson for investors is simple:

Do not judge a company only by its IPO story. Judge it by the business behind the shares.

And for promoters, the message is equally important:

An IPO should mark the beginning of greater accountability—not the end of it.

Frequently Asked Questions — Nepal IPO and Promoter Shares

What is an IPO in Nepal?

An Initial Public Offering (IPO) is the process through which a company offers shares to public investors and becomes eligible for listing on the stock exchange, subject to applicable regulatory requirements.

Why do companies issue IPOs?

Companies may raise public capital to finance expansion, projects, working capital, debt management or other purposes disclosed in the relevant offering documents.

What are promoter shares in Nepal?

Promoter shares are shares held by founders or designated promoter shareholders under the applicable regulatory and corporate structure. Restrictions can apply to their transfer and conversion.

Why is promoter shareholding important?

Promoter ownership can influence management incentives, corporate governance and the alignment between company founders and public shareholders.

Should investors look only at IPO price?

No. Investors should also examine profitability, cash flow, debt, valuation, promoter background, use of IPO proceeds, governance and future capital requirements.

Can an IPO company fail to pay dividends?

Yes. Listing on the stock exchange does not guarantee dividends. Dividend decisions depend on profitability, retained earnings, cash flow, regulatory requirements and the company's capital needs.

Is every new IPO a good investment?

An IPO should be evaluated on its individual fundamentals, valuation, business model and risks. Investors should not assume that a new listing automatically represents a strong investment opportunity.

Where can investors check official IPO information in Nepal?

SEBON publishes official information on IPO approvals and public issues. Investors should review regulatory documents and company disclosures before making investment decisions.

What is the difference between business growth and liquidity extraction?

Business growth occurs when capital is used to expand productive activity and create sustainable economic value. Liquidity extraction refers more broadly to shareholders converting their ownership into cash. The two can occur together, but investors should examine whether capital-market activity is contributing to long-term business development.

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Disclaimer: This article is for educational and informational purposes only and should not be treated as investment advice. Investors should review official company disclosures, prospectuses, financial statements and regulatory information before making investment decisions.