Civil Capital declines to underwrite undersubscribed shares of Lotus Finance
RUPAK D SHARMA
KATHMANDU, Sept 27: In a case of ad-hoc decision making and unethical business practice, an underwriter, which was supposed to purchase shares of a financial institution that remained undersubscribed during a recently launched initial public offering (IPO), has outright rejected to take the liability.
This is the first case in which an underwriter had declined to play by the rule, according to Securities Board of Nepal (Sebon), the secondary market regulator.
Experts say inability of the regulator to take a concrete decision on the matter may encourage underwriters to take such matters lightly, leaving the IPO market in a mess.
This case involves Lotus Investment Finance - which floated 800,000 units of shares worth Rs 80 million to the public on June 10 to raise its capital to Rs 200 million to meet the central bank´s requirement - and Civil Capital Market Limited, which was appointed the underwriter by the category ´C´ financial institution.
The Securities Issue Guideline obliges every company launching IPO to appoint an underwriter that can purchase at least 50 percent of the floated shares. This offers cushion to companies as they need not worry even if investors give lukewarm response to the public offering.
Lotus had appointed Civil as its underwriter based on the guideline. And as per the agreement between the two - which has been seen by Republica - Civil had agreed to purchase 50 percent of the shares for Rs 40 million in case the stocks offered to the public remained undersubscribed.
But after the IPO was able to raise only Rs 11.31 million - only 14 percent of the targeted amount - Civil backtracked from its promise. It then requested Sebon to give it permission to return the amount raised from the public and re-launch the IPO.
"This decision was taken as promoters of Lotus failed to respond to the request of purchasing remaining shares," Civil said in a letter to Sebon dated Aug 15.
Civil was referring to shares worth Rs 28.69 million, which would have become the liability of promoters even if the underwriter fulfilled its obligation of purchasing Rs 40 million worth of shares as mentioned in the agreement.
"Since the promoters could not come up with the amount in time, the agreement is no longer valid and Rs 11.31 million raised from the public should be returned as soon as possible," Bhism Raj Chalise, CEO of Civil Capital, told Republica.
Lotus has, however, said Civil´s decision is unacceptable as its promoters have already made a written commitment to Sebon to inject Rs 28.69 million into the company by mid-July next year, when the central bank´s deadline on raising capital expires.
"Civil also has no right to say the agreement is void as the contract explicitly says it will cease to exist only if Lotus fails to launch IPO in time," Samaj Prakash Shrestha, CEO of Lotus Investment Finance, told Republica. "Since we floated shares on the primary market in time, it is wrong of Civil to blame us."
A high-ranking official of Sebon, on condition of anonymity, on the other hand, termed arguments made by Civil as "baseless". "It should have purchased the shares without making a fuss," he said.
He, however, said Sebon was not able to take an instant decision on the case as very few investors participated in the IPO and "if the promoters fails to inject capital on time, the finance company may face central bank´s action, which would put depositors money at risk."
"But we will present the issue at the next board meeting and come up with a decision," the official said.