KATHMANDU, April 9: The Securities Board of Nepal (SEBON) has tightened the noose on companies with poor financial health seeking to go public, introducing a provision for third-party audits of such firms.
Under a newly endorsed guideline on primary share issuance approvals, SEBON will re-examine the financial details of companies that show persistent losses, weak net worth, or signs of financial manipulation. Firms deemed financially vulnerable will be placed under review, with independent experts conducting external audits.
The regulator has faced allegations of approving initial public offerings (IPOs) of financially weak companies without properly vetting their financial status. Many such companies have been found manipulating their records to secure regulatory approval.
Sebon tightens the noose on issuance and trading of shares of h...
Industry observers say the previous ease of regulatory approval allowed promoters of such companies to earn substantial returns at the expense of small investors.
With the board now set to closely evaluate each company based on financial indicators, firms will be required to ensure strong and transparent financial conditions before going public.
“If a company’s net worth, after adjusting for taxes or other potential government liabilities, is found to be less than half of its paid-up capital, the financial statements of such companies will be subject to mandatory scrutiny by an independent expert,” the new standards state.
Additionally, if more than 75 percent of a company’s total sales revenue is shown as loans or trade receivables, those details will be considered suspicious, and the firm will be placed under special scrutiny. This provision aims to prevent companies that have not actually generated revenue or have artificially inflated sales volumes from issuing IPOs.
The board will also conduct a detailed study of a firm if more than 30 percent of its main assets have been purchased from or sold to related parties, or if its accounting policy has been changed to meet financial standards in the audited statements of the past three years.
Further grounds for strict investigation include cases where net worth and profit standards are met only through non-operating income or reserve funds. A company will be disqualified if found adjusting the auditor’s remarks, or where financial statements have been altered to meet standards under the pretext of correcting previous errors.
SEBON has also endorsed separate standards for different sectors. For manufacturing industries, the threshold for credit sales that remain unrecovered is set at 75 percent of total sales to avoid detailed regulatory review. For the hotel and tourism sectors, that threshold is 50 percent.
