The conclusion of the report shows that after issuing shares to the general public, aggressive business expansion should follow. However, the fact that founders sell all their shares and exit indicates a lack of confidence in the company itself.”

A government agency study has highlighted that founding shareholders of companies, who established hydropower projects aiming for long-term profitability, do not have confidence in their own shareholding. The study conducted by the Nepal Securities Board on the ‘current state of share structure and its impact’ has shown that most founding shareholders of listed hydropower group companies exit after the ‘lock-in’ period (a period where shares cannot be sold).

The study committee formed under the coordination of Phanindra Gautam, then member and joint secretary representing the Ministry of Law on the Board of Directors, has prepared the report. “The report states, ‘After the ‘lock-in’ period, there has been an increasing trend of founding shareholders of hydropower group companies selling their shares and exiting the market,’ ‘When studying the details and documents received from 43 companies listed on NEPSE, it is observed that founders of 20 hydropower companies have sold their shares.

As of last Friday, there are 91 companies listed on the Nepal Stock Exchange (NEPSE) in the hydropower sector. The number of companies approved for public issuance and in the pipeline continues to increase. Out of the total number of companies listed on NEPSE, the hydropower sector comprises the majority.

Investors of organized institutions have four types of shareholders: those who invest in the company’s founding shares, employees of the organization, local residents from project-affected areas, and general investors who invest in shares when the organization issues securities to the public. Among these, there is a provision of a ‘lock-in period’ for shares purchased by founders, employees, and project-affected individuals, excluding shares held by the general public. Shareholders in this group cannot sell their shares for up to three years after the company’s public issuance.

The study has shown that founding shareholders of listed companies sell their shares after the ‘lock-in’ period, as revealed. The report was submitted to the Securities Board Directors Committee a year ago (on June 30, 2023). Based on the report, the board issued some general instructions but has still kept the report confidential. The report has raised some serious questions regarding listed companies in the hydropower group. Therefore, officials from the Independent Power Producers’ Association (IPPAN) expressed dissatisfaction with the report. The report mentions abnormal debt-to-equity ratios in hydropower companies. Producers also expressed objections. That is why the study report remains confidential, according to board sources.

After the issuance of shares to the general public, it is confirmed that the business expansion often leads to aggressive selling of all shares by the founders, indicating a lack of confidence in the company. An analysis of the capital structure and cost situation of some listed companies in the hydropower group shows that most hydropower companies have taken more loans than equity.

Some projects have also seen an unnatural increase in costs. The report also highlights that due to these high costs, some hydropower companies listed in the secondary market are unable to provide returns to investors. ‘When analyzing the cost per megawatt of listed hydropower companies, the report found that the lowest cost per megawatt was 135 million and the highest cost was 314 million 48 million,’ the report stated.

The conclusion of the report emphasizes the necessity of protecting investors’ interests due to the high debt-to-equity ratio. Therefore, the report suggests that for the organized institutions of the hydropower group, early issuance, rights issuance, and systematic restructuring of the share structure should be arranged to ensure effective protection of investors’ rights. Hence, amendments to the securities-related legal provisions and necessary improvements are recommended.

Analyzing the share structure of companies in the hydropower sector, there does not appear to be any change in the ownership of companies issued by the Government of Nepal and its subordinate bodies,” the report states. “However, for companies with share investments made through individual investors, investment companies, and private groups, especially after the ‘lock-in period’ specified in the regulations, the founders who held a large share of the company have sold their shares and exited, holding a very minimal share.” The report concludes that the sale of shares by founders and their exit negatively impacts the hydropower group, company operations, and investor returns.

The committee suggests that in order to protect investors’ interests, the current share structure of the listed companies in the hydropower group is impractical and requires policy amendments. ‘Since the project duration of companies in the hydropower sector is for a fixed period, a high-level mechanism should be developed between the Nepal Securities Board, the Government of Nepal, the Ministry of Finance, and the Ministry of Energy to propose an appropriate policy to the Government of Nepal regarding the investment and share structure after the project is transferred to the Government of Nepal as equity,’ the report states.

The report also suggests that founders should retain at least 30 percent of their shares for seven years, and that the board should approve the conversion of founders’ shares into public shares proportionally based on the company’s payment period during the securities approval process. Additionally, the report calls for further policy arrangements in light of the observation that companies in the hydropower group have not completed their projects within three years of their initial listing.

The study committee also suggested that for a public issuance, hydropower companies should be required to submit certified details proving that at least 50 percent of the necessary physical infrastructure progress for their intended purpose has been completed. Additionally, the report recommends that the funds received from the public issuance should be used solely for the repayment of bank loans or for the completion of the company’s ongoing construction projects.

Source: Kantipur