Standard Chartered Bank Nepal raises Rs 3.30 bn through FPO - How fair is the allotment?
Standard Chartered Bank FPO Allotment of 2.55 million shares
Standard Chartered Bank Nepal Limited (Nepse: SCB) is allotting its 2.55 million shares today—formally concluding its Further Public Offering (FPO) that saw participation of more than 220,000 applications and subscription of more than Rs 36 billion. The issue, worth Rs 3.30 billion, was oversubscribed by almost 11 times. An issue, this huge, always adds immense pressure to the company that is raising the capital. In this case, NMB Capital Limited, was acting as the merchant banker and issue manager for the FPO of Standard Chartered.
The Allotment of Retail Investors
In the context of Nepal, any investor who applies less than Rs 50,000 for a public offering is categorized under "Retail Investors". Under the rules made by the market regulator, SEBON (Securities Exchange Board of Nepal), retail investors are to be allotted a minimum of 40% of shares.
In the allotment of shares of StanChart, applicants who had applied 10 units to 30 units of shares were decided through lottery. This trend is in sync with the latest FPO of Nepal Life Insurance Company.
Applicants who had applied 10, 20 or 30 units were decided through lottery. Those who were lucky enough to get shares, were allotted just 10 units.
Allotment for Large Investors
Any applicant that invests more than Rs 50,000 is categorized under the "Large" categeory. In case of this particular issue, applicants who had applied from 40 units of shares to 140 units of shares will be decided through lottery as well. They will also be given only 10 units shares each.
For other applicants who applied more than 140 units, all will be allotted a flat 6.38%. As such, any investor who applied more than Rs 193,500 for the FPO of Standard Chartered Bank will be allotted a minimum number of 10 units.
Those who applied up to 140 shares got 10 shares through lottery. Flat 6.38% for others.
Let's analyze the maximum units for each category
Retail Investors - applied for 30 units - got 10 units
Large Investors - applied for 25,580 units - got 1,630 units
Is this allotment fair?
To apply for 25,580 units, an investor has to gather up almost Rs 33 million. To apply Rs 33 million and get hold up for almost 2 months is the most unfair condition in Nepal's primary market. Although this particular issue saw increased participation for the new automated ASBA process, the issue was delayed beyond the deadline set by the market regulator.
In the secondary stock market, Rs 33 million would have made a remarkable profit for any investor. Unfortunately, the week after StanChart's issue was closed, Nepal's stock market witnessed a tremendous growth: a rise in NEPSE index of more than 348 points in a matter of 3 weeks. The index surged from 1,355 to 1,703 points. This growth adds to millions of rupees in opportunity cost for the particular investor who had applied Rs. 32.99 million for this FPO. And in the end, he only got 1,630 shares whose market value is now worth only Rs. 3.5 million.
Take a look at this figure:
An investor takes loan of Rs 33 million for 15%. In two months, he has to pay Rs 0.825 million in just interest for the loan. He invests in SCB hoping to get a better return. In the end, he is allotted 1,279 shares whose worth is Rs. 3.5 million. He paid Rs. 2.1 million for the shares. His return from the investment = Rs 3.5 - Rs 2.1 million = Rs 1.4 million
Net return = Rs 1.4 minus Rs 0.825 million = Rs 0.575 mn
Calculate his return % = 0.575 divided by 33 = 11% per year
This is the horrendous number one has to be satisfied with.
Why go into this sort of trouble when most of the banks in Nepal provide more than 13% per year return on fixed deposit accounts? Will this not discourage investors from the capital market?
Further Reading: 10 Mutual Funds You Can Buy in Nepal
Nepal's Capital Market Lacks Market Regulator
Securities Exchange Board of Nepal (SEBON), the market regulator, has to do a lot of homework and reforms before it can even call itself a regulator. Until and unless it acts against merchant bankers who can hold up investors' money for months in the name of work, Nepal's equity market cannot prosper. Unless it can come out with serious consequences for market exploiters, the industry will never grow. Unless it can come up with reformed provisions for public issues such as this, investing in primary market in Nepal will always be subjected to exploits.