December 6, Kathmandu – Establishing a public company to build hydropower projects, later listing it on the stock market, and issuing a limited number of shares to the general public. Creating a close-knit group to control the supply of these limited shares and enhance their value, thereby maintaining a higher share price.
After a three-year lock-in period for shares distributed to the public ends, founders’ shares can also be sold at the prevailing market price. Gradually selling all shares at higher prices and exiting generates significant profits from these shares.
When founders gradually sell their shares, market supply increases, leading to a decline in share prices. By that time, most shares are already held by the general public. This practice has become a significant issue recently observed in hydropower companies.
Another concern is the creation of artificial expenses during project construction, inflating the per-megawatt cost, and then issuing rights shares to use the proceeds to repay bank loans.
Founders know that expensive projects may take years to generate returns, which is why they often sell their shares and exit as soon as the three-year lock-in period ends. There are numerous cases where projects have not even been completed when the founders exit. In other words, founders often sell their shares before project completion.
Currently, there are 91 hydropower companies listed on the stock market. A study report from the Securities Board reveals that among the listed companies with private sector investment, major founders have been observed exiting. However, founders representing government entities and their subsidiaries have not exited. The report indicates that in 26% of companies, founder shareholders exited after the three-year lock-in period expired. It specifically identifies the companies and shareholders involved.
Citing this malpractice, the Public Accounts Committee directed the Nepal Securities Board in January 2024 (Poush 2080) to ensure that at least one-third of founders’ shares remain intact until the project’s debt is repaid.
The committee’s directive states: “While a three-year lock-in period is enforced for primary investors when establishing hydropower projects, it has been observed that these investors exit after the lock-in period ends, even before the project’s construction is completed or profits are generated. This has impacted the construction process and hindered returns, necessitating such a directive.”
Ganesh Karki, president of the Independent Power Producers’ Association of Nepal (IPPAN), asserts that founders remain accountable until the project’s bank loan is repaid. “When banks provide loans, they require a guarantee from the founders. Until the loan is repaid in full, founders cannot sell all their shares and exit,” he said. “As the loan is repaid, the bank gradually releases the shares.”
A study by the Securities Board has shown that founders of hydropower companies tend to exit completely after the lock-in period ends. Former Chairman of the Board, Ramesh Kumar Hamal, established a committee led by Phanindra Gautam to assess the share structure of listed hydropower companies and its implications.
The committee’s report highlighted that founders responsible for project construction sell their shares and exit the company once the lock-in period expires. “It seems that most founder shareholders of hydropower companies sell their shares and leave the market after the lock-in period ends,” the report noted. It suggested that the Securities Board implement policy measures to extend the lock-in period for founders or mandate them to retain a portion of their shares.
“There is significant misconduct among founders in the hydropower sector. While the Securities Board oversees regulation, it can address these issues through policies related to share holding or lock-in periods,” said Dr. Rewat Bahadur Karki, former board chairman and economist.
The board’s policy and program for fiscal year 2081/82 (2024/25) includes plans to study and revise regulations related to the lock-in period for founders’ shares.
A senior official from the Securities Board stated that shares allocated to affected locals also have a three-year lock-in period, suggesting a need to extend this for founders, which is part of the board’s policy and program. However, doubts remain about whether this provision will be incorporated into the Securities Registration and Issuance Regulations.
The official added that under the Companies Act, firms with capital over NPR 10 million can easily go public and issue shares. This allows smaller hydropower companies to issue shares without restriction.
The Securities Board currently faces significant competition from hydropower companies seeking to issue shares. Currently, 37 hydropower companies are in the IPO pipeline, the highest among all sectors.
On December 28, 2023 (Poush 12, 2080), the Public Accounts Committee directed the board not to approve IPOs for companies with a net worth per share below 90. This directive has affected the IPO process. An official from the board noted that most companies seeking IPO approval have a net worth below 90 and emphasized the need to revise this directive.
If companies with a net worth per share below 90 are barred from issuing IPOs, it could lead to legal complications, according to Ganesh Karki, President of IPPAN. “A legal provision mandates that a portion of a project’s shares be allocated to the public,” he said. “Enforcing this rule could end domestic private sector investment in the hydropower sector.”
Since there are no specific regulations for all companies, those with paid-up capital exceeding NPR 10 million can issue IPOs under the Companies Act. Regulations for banks, financial institutions, and insurance companies exist separately.
Investors have pointed out instances where founders exited by selling shares to the public, leaving companies bankrupt. “Investors seek substantial returns, but strong government regulation is necessary to curb malpractices by founders,” said Tulsi Ram Dhakal, President of the Nepal Investors Forum.
Karki proposed incentivizing tax exemptions for large, well-performing companies while setting net worth per share thresholds for poorly performing ones.
It has also been observed that founders profit by inflating project costs. Initial estimates may be NPR 150–160 million per megawatt, but by project completion, costs often double, making investments less viable.
Ganesh Karki noted that cost increases in some projects are due to geographical challenges. “Certain projects are located in difficult terrains, and natural disasters or uncontrollable factors can lead to delays and higher costs,” he explained.
The Securities Board’s report revealed that projects costing as much as NPR 314.8 million per megawatt are in operation. Such projects often prevent investors from recovering their investments even within the license period.
The Electricity Regulatory Commission, which oversees hydropower projects, has received numerous complaints about inflated project costs. “We are preparing to draft procedures to address these complaints,” said Ram Prasad Dhital, Chairperson of the Commission. He added that the procedures would include provisions to disallow Power Purchase Agreements (PPAs) for projects exceeding a specific per-megawatt cost threshold.
“Only after studying the exact threshold will we know,” he said. “Currently, we are conducting an average cost analysis of nearly 300 ongoing projects, which will form the basis for the decision.” Once finalized, projects deemed too costly will not be approved.
How does the share price of hydropower companies rise before the lock-in period ends? An example is Kuthali Bukhari Small Hydropower. This company operates a project with a capacity of less than 1 megawatt (998 kilowatts) and has issued 20% of its shares to the public. The project cost is estimated at around NPR 250 million.
The founder did not issue shares to raise the NPR 250 million needed for the project. The aim of issuing shares was to profit from selling them. Currently, this company is the most expensive hydropower stock on the market.
The company’s share price is around NPR 2,650, despite a net worth per share of only NPR 147. Why is this company so expensive? The common explanation is that few shares are available, which, in a demand-driven market, naturally pushes up prices. However, the Securities Board does not regulate prices based on demand and supply.
There are 1,218,675 shares listed for this company. Of these, 20% (243,735 shares) were issued to the public and are traded. The remaining 80% belong to the founder.
The 80% of shares are not traded due to a three-year lock-in period. This allows a specific group to potentially manipulate and control the price of the 243,735 shares held by the public. The remaining 974,940 shares, held by the founders, were initially valued at NPR 97.4 million.
When the lock-in period expires on 7th Shrawan 2083, if the average share price is NPR 2,000, the value of the founders’ shares would be NPR 1.94 billion. This means that selling shares originally worth NPR 97.4 million for NPR 1.94 billion would yield a 20-fold profit over three years. This exemplifies the anomaly.
Investors in Projects with No Returns
Some rivers have seen reduced water flow due to climate change, impacting long-term project revenue. Many projects are only producing about 30% of their annual capacity. Reduced energy production combined with high installed capacity costs has increased investment risks, says Ram Prasad Dhital, Chairperson of the Regulatory Commission.
“PPAs for inexpensive and expensive projects are the same, but costly projects struggle to even pay interest on loans, leading to rights issues that burden public investors. This is an issue the Securities Board must address,” Dhital said.
He added that average annual energy production of 5 gigawatt-hours per megawatt is considered standard, with anything above that deemed good. However, some projects produce only 3 gigawatt-hours per megawatt, resulting in reduced revenue. Companies running such projects are unable to pay dividends throughout the license.
Source: Online Khabar
