How much time did you take while applying for the last IPO? Just few minutes may be because you didn’t investigate about the company neither did you assess if it would give any return. I got you right?
Behold! You are not an exception. Majority of Nepalese do the same. There is an IPO mania among individuals, making it a gambling game. They see IPO as luck, if allotted, generates profit in short period. However, IPO in essence is an investment which necessitates an informed financial analysis.
Initial Public Offering (IPO) as the name suggests, is the process of issuing shares of a company to general public for the first time. It is a strategic decision that makes a company status from privately owned to publicly owned. The primary reason of going public is to finance its activities like expansion, innovation, developing a new product line, debt payment and so on. Going public enhances company’s reputation and credibility. However, it has some drawbacks as well such as losing control of decision making, loss of secrecy, high cost going public and regulatory burden, etc.
For investors, it provides an opportunity to become shareholders of companies, helping in utilization of savings and earn return on their investment. Similarly, for economies, it helps in capital formation, efficient utilization of resources and uplifting economic standard of people.
A recent IPO of Pure Energy Ltd. was oversubscribed by 17.25 times. But this is not a surprise in the context of Nepal. Applying for IPOs has become very easy in Nepal after the introduction of Mero Share application. It has made applying for IPOs accessible to everyone. As a result, the trend of oversubscription of IPOs has begun.
Historically, when NEPSE was dropped by 67.86 points on its first week of reopening after the earthquake of 2072 B.S., the primary market was still lucrative. IPO of Bhaktapur Finance was oversubscribed by 3 times, and Mirmire Laghubitta Bittiya Sanstha Limited by 220 times within two weeks of the earthquake. Similarly, the IPO of Emerging Nepal Limited was oversubscribed by over 14 times on the first day, forcing an early closure of application. This shows the craze of IPO and the irrationality of Nepalese in making financial decisions.
Why does this happen?
The ultimate goal is short-term gain. The gain is often a result of listing gain (profits made by selling IPO immediately after it is listed). It happens because IPOs are typically underpriced than expected market price in Nepal. Regarding this, Subedi and Dangol, 2022 writes that IPOs in Nepal are mostly underpriced as the return from the first day trading is positive and are mostly oversubscribed in the Nepalese Capital Market. Given that the funds raised during the IPO are insufficient, underpricing results in a loss for the issuer (Souitaris, 2020).
The rush towards IPO is due to some factors like low capital requirement with a minimum of NRS 1000, low risk as the amount is refunded if not allotted, and maximum loss of NRS 1000 if allotted but does not perform well. Similarly, the positive returns of past IPOs are also a driving factor. The study conducted by Tamang P. (2022) shows a positive association with the factors identified above, including some other factors like ease of access to information and application process, and overconfidence bias among investors. She concludes that these are the most significant factors for the general public.
Are they real investors?
The first thing that investors have to do is to understand the company’s fundamentals and risk. They have to diversify risk by investing in a mix of stocks with long-term goals. In contrast, people in Nepal apply for the same industry without understanding its attractiveness and risks, underscoring the gambling intention. Similarly, they tend to wait for the prices to reach saturation level, and whenever the price falls for the first time, they immediately sell it. Similarly, when they don’t get a share in multiple attempts, they stop applying being frustrated.
According to the CDSC annual report of FY 2080/81, there are over 63.95 lakh demat accounts, showing a rise of 10 percent from the previous year. Individuals open accounts of the whole family with the hope of increasing the probability of getting share. However, the surge in number does not show active participation and regular trading in secondary market. As a result, large portion of account holders remain inactive beyond IPO application highlighting the lack of understanding about broader functions of capital market.
The dark side
The stock market, including the IPO sector, has been identified as susceptible to manipulation by certain groups. These manipulators may inflate the price of IPOs through various tactics, creating artificial demand and a price bubble. Uninformed speculative investors can get caught buying at inflated prices, only to face significant losses when the bubble bursts and major shareholders transfer their shares. Though the Securities Board of Nepal has issued a statement warning people not to try to manipulate the Nepal Stock Exchange (NEPSE) by providing suggestions on which shares to buy or sell, these activities are still prevalent. Since the market is small, it is easier to manipulate investors by few individuals and groups. This influences the demand and supply resulting in price swings. Due to the small number of shares in circulation, these stocks can be more easily influenced by traders or market participants attempting to drive prices in a specific direction (Turck K.D. ,2025).
Speculators often ignore risk, making them vulnerable to unforeseen negative consequences that can drastically impact the share price. Even the companies showing losses in their financial statement have seen their prices hype. Over 26 percentage of companies listed in NEPSE are operating at loss. Despite this poor financial performance, their share prices are artificially inflated due to manipulation by specific groups. This shows how ordinary investors are exploited.
What to do?
The prevalence of IPO speculation over fundamental investing in Nepal suggests a potential lack of awareness or understanding among some participants regarding the principles of long-term wealth creation through informed investment decisions. If the IPO market is perceived as a gambling arena rather than a platform for long-term investment in viable businesses, it may deter companies with strong fundamentals from going public, thus hindering capital formation for productive purposes.
It is now crucial that individuals make well-informed investment decisions and that companies effectively utilize IPOs as a mechanism for growth and resource optimization. Addressing the issue of uninformed speculative IPO participation is therefore crucial for the long-term health and development of the Nepalese capital market. Therefore, Securities Board of Nepal (SEBON), Nepal Rastra Bank (NRB), financial institutions, and all concerned authorities should strengthen and expand financial literacy programs with a specific focus on stock market investments and the risks of IPOs. Investors, as well, have to equip themselves with the skills and knowledge to be a part of the complex capital market without the help of others beforehand.
