The board of directors meeting of SEBON held on Monday approved the 'Criteria for Review of Financial Statements Submitted for Initial Public Issue'.
With the approval of the criteria prepared by a high-level study committee formed under the leadership of Ananda Raj Sharma Wagle, Board Director as well as Vice-President of the Institute of Chartered Accountants of Nepal (ICAN), it has been ensured that only 'good companies' will enter the IPO market. The new rule, which comes as a "criterion for reviewing financial statements", sets a strict test for the financial health of companies seeking IPOs.
After complaints were received that companies mainly from hydropower, hotel and manufacturing sectors were manipulating the financial details and issuing IPOs to the public, SEBON had formed a study committee under the leadership of Wagle. SEBON believes that the move will put an end to the practice of making decisions at one's discretion and develop an objective system. "
What's in the new standard? Here are 7 trigger points:
This criterion identifies 7 main 'trigger points'. If these trigger points are found in a company's financial statements, such a company will have to pass a more stringent test (DDA).
1. Artificial inflation in Net Worth: According to the existing law, the net worth per share should be at least Rs 90 to issue an IPO. However, many companies have been found to raise Rs 90 on paper only by showing fake income or by showing capital expenditure in income. Now, such a microscopic study of 'paper net worth' will have to be done by the issue manager and auditor.
2. Negative Operating Cash Flow: Operational cash flow shows whether a company has made a profit from its actual business. "There was high risks of seeking IPO by showing profit in papers without carrying out operations. Now if the operational cash flow is negative, it will be a trigger point,” says Wagle.
3. 75% limit of 'Other Income': If the company shows more that 75 percent income from ‘other sources’, such files will be considered suspicious. This will discourage the tendency to extort money from the public by selling assets or by showing profits only from interest while their main business has dried up.
4. Credit and Fake Sales: In order to prevent the tendency of inflating profit through credit and fake sales, the standards have been tightened on such practices. If the credit amount of more than one and a half to two years old is found to be high, it will be considered a 'trigger point'. It will force the companies to keep their balance sheets real.
5. Compulsory DDA: If any of the above deficiencies are found in the file of a company, SEBON will not approve it directly. Such companies will now have to mandatorily undergo a DDA (valuation of assets and liabilities) by an independent expert. If the net worth is less than 90 after the adjustment made by the DDA, then the IPO application of such a company will be automatically canceled.
6. Accountability of sales manager and auditor: Till date, issue managers have been submitting the details given by the company as it is to the board. Now this criterion has made them 'financial watchdogs'. The Issue manager has to identify the trigger point and get the DDA done. If they fail to do so, the board will take strict action against both the issue manager and the auditor.
7. Transparent selection process: The criteria will automate the selection of companies eligible for IPO issue.
