The latest Initial Public Offering (IPO) in the Nepali market — of Ridi Hydropower — saw its offer launched in mid-February getting oversubscribed by more than 87 times. The hydro company was assigned IPO Grade 3 rating, indicating average fundamentals, by Nepal’s only credit rating agency — Icra Nepal.
Likewise, another offering held in January — that of Century Commercial Bank — was able to generate 22 times more funds than the offered amount of Rs 920 million. The commercial bank had been granted Grade 4+ by Icra Nepal, which indicated below-average fundamentals.
In July 2013, Rural Microfinance Development Centre (RMDC)’s offering that had been granted Grade 3+ credit rating was able to see subscription of over 11 times. Surprisingly, microfinance bank — Sana Kisan Bikas Bank — saw its IPO oversubscribed by 60 times during the same period despite being assigned Grade 3 rating — a notch lower than that of RMDC.
These instances signal that general investors are immune to credit rating and their investment decisions are not influenced by the credit rating assigned by the agency. Credit ratings are considered to be a simple yet effective indicator aiding ordinary investors to take decisions regarding the purchase of securities — better rated issues should have garnered better subscription rate.
“The public is not aware about the implications of credit rating yet, so they are not analysing the public issues based on the grading assigned,” pointed out Rabindra Bhattarai, a share analyst.
More than a year ago, the capital market regulator — Securities Board of Nepal (Sebon) — had made credit rating mandatory for public issues exceeding Rs 30 million. The idea of making credit rating mandatory was to assist investors in their investment decisions so that they can have an additional parameter to assess the financial health of the company they will be associated with.
“Moreover, the effectiveness of credit rating would have been more visible if there had been more institutional investors in the Nepali market, which tend to be more cautious about ratings to figure out whether to buy, sell or hold the shares,” pointed out Bhattarai.
Furthermore, IPOs are being taken as a lottery by investors where they can easily earn 20 to 50 per cent return in three months by spending a flat sum of Rs 100, in the absence of free pricing regime for floatation. “Grading may be useful information to rationalise the IPO market when pricing of equity issues is free,” pointed out Deepak Raj Kafle, managing director of Icra Nepal.
“But, since most of the shares are being floated at face value without any premium attached, investors do not hesitate to subscribe for the shares without giving much thought to the fundamentals or financials of the company,” he added.
According to Kafle, investors will start assessing the risk and return relative to the credit rating assigned, once the companies start to float shares at a premium value.
RMDC had offered shares at a premium price of Rs 180 instead of the face value of Rs 100, which might explain the lukewarm response to the offer than that of Sana Kisan Bikas Bank, even as the former had relatively better rating.
Similarly, Century Commercial Bank’s issue also got an overwhelming response due to the bank being the last commercial bank to float shares. It was the last chance for investors to get their hands on shares of a class ‘A’ bank at Rs 100 when the bullish secondary market had already pushed the prices of the banks higher.
“Although, grading is not an opinion on pricing, valuation and possible gains of the issue but a simple objective of relative fundamental position of the issuers,” Kafle clarified.
source: the himalayan times,5 april 2014
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