Amid allegations that the Securities Board of Nepal (SEBON) accepted bribes to approve initial public offerings (IPOs) of several hydropower companies, the Office of the Attorney General (OAG) has highlighted serious flaws in the approval process. The OAG has stated that this poses risks to the investments of mainly small-scale investors.

After hydropower company operators accused SEBON of demanding commissions of up to five percent of the IPO amount, the Commission for the Investigation of Abuse of Authority (CIAA) raided SEBON's office last week and launched an investigation. Currently, SEBON has suspended the IPO approval process for 89 hydropower applicants.

In its 62nd Annual Report, the OAG expressed concern over SEBON’s approval of IPOs at premium prices for four life insurance companies. Nepal Life Insurance Company, IME Life Insurance, Sun Nepal Life Insurance Company, and Citizens Life Insurance Company were allowed to issue IPOs at premium rates, but SEBON did not conduct adequate due diligence, reads the report.

The OAG stated that SEBON failed to properly analyze important documents such as company net worth evaluations, actuarial assessments, and the justification for writing off company expenses. It also noted inconsistencies in setting interest rates that exceeded the thresholds established by the regulator.

The OAG report also pointed to weak regulatory enforcement that has enabled hydropower companies to illegally sell promoter shares. Although SEBON has set a three-year lock-in period for promoter shares, during which they cannot be sold, a number of companies were found to have transferred shares before the end of this period.

In addition, several hydropower companies received permission to issue IPOs even before completing half of their project construction, violating the mandatory requirement. “Many companies are engaging in the malpractice of showing project expenditures as profits to lure a higher number of investors,” the OAG report stated.

The OAG has also called on relevant authorities to investigate a manufacturing company that presented unpaid electricity bills as assets in its financial statements in order to issue IPOs at premium prices.

Other malpractices observed in the IPO approval process include inflating profits by including worker-related liabilities under social security expenses in profit/loss statements and undervaluing depreciation amounts, according to the OAG.