New Standards to Screen Suspicious Details in IPO Issuance Process to Be Developed

March 21, Kathmandu – The Nepal Securities Board is planning to regulate tendencies among companies to present weak financial conditions in a stronger light during the initial public offering (IPO) process.

The Board has advanced plans to develop a new mechanism to verify the authenticity of the financial statements submitted by companies seeking to issue IPOs.

Criticism has been growing against the Board for allowing companies with weak financial conditions to proceed with IPO issuance.

There have been complaints filed with the Commission for the Investigation of Abuse of Authority (CIAA) against senior officials of the Securities Board for permitting IPOs for financially weak companies.

Following this, the Commission conducted inquiries with some Board officials based on these complaints. Previously, the Parliamentary Public Accounts Committee also raised concerns and directed the CIAA to investigate further.

In response to the criticism surrounding the IPO issuance process, the Board has initiated reforms in this area, an official from the Securities Board stated. Recently, companies with poor financial conditions seeking approval by manipulating their financial statements have increased, highlighting the need to verify the authenticity of information, the official added.

“Even organizations without regulatory bodies have applied to the Board for IPOs,” the official said. “We find it necessary to be confident about the actual condition of companies, which will help protect investors. To that end, we have deemed screening of companies necessary.”

The official noted that granting direct IPO approvals to companies without regulatory oversight has complicated coordination in addressing share-related issues.

“The Board is seeking to hold merchant bankers more accountable regarding the financial statements and documents prepared for the IPO process,” the official said. “We have started developing standards to review financial statements submitted for public issuance.”

Beyond just granting merchant bankers the business rights, the Board intends to make them responsible for investigating the companies’ conditions and future prospects, the official added.

In recent years, capital-raising through public issuance has notably increased in Nepal’s capital market. Banks, financial institutions, insurance companies, and hydropower companies are active in primary and secondary markets.

There is also a significant number of companies from other sectors that have registered securities and approached the Board to issue shares via IPOs.

The Board has pointed out that when companies without direct regulatory bodies request IPO approval, risks arise related to their business continuity, corporate governance, financial transparency, and compliance with laws and regulations.

As the securities law lacks clear provisions for withdrawing or rejecting IPO applications, the Board has begun developing transparency and investor protection standards on this matter, the official said.

The Board concluded that since issues not covered in audits must be considered before granting IPO permissions, there is a need to establish standards addressing these points.

If any discrepancies are found in audit reports, the financial impact caused by these must also be addressed, the official stated. Standards should be introduced to regulate and control the financial statements of institutions under the Board to avoid complaints from constitutional bodies, regulators, or the public.

Standards are also necessary to analyze project operational capacity and associated risks mentioned in audited financial statements.

Officials assert that the Securities Board must establish a specific mechanism to analyze the financial status of companies without direct regulatory oversight.