The Finance Committee of the House of Representatives has directed the Securities Board of Nepal's (SEBON) to proceed with the stalled initial public offering (IPO) of Reliance Spinning Mills but has ignored the Patan High Court's order regarding the issue.

The court had issued an interim order on July 10 after hearing a writ petition filed by four individuals, including Hari Bahadur KC, on July 9, seeking to halt the company's planned share issuance through the book-building method. The court had ordered to halt the IPO issuance.

However, on July 29, the court ordered that the interim order not be continued. Subsequently, the Finance Committee issued written instructions to SEBON on January 17 to implement the court's directive “not to continue the short-term interim order” issued on July 10. However, the letter did not refer to the full text of the High Court's decision issued on November 6, which was made public recently.

In its verdict, the court stated that Reliance Spinning Mills must publish a revised prospectus for the shares it plans to sell to the public. The verdict emphasized that SEBON, as the autonomous regulatory body overseeing the securities market, holds the authority to resolve obstacles and make decisions regarding the prospectus.

The company had allotted 770,640 shares to eligible institutional investors at Rs 912 per share on January 29, 2024, which constituted 40% of the shares reserved for public sale. Reliance Spinning Mills plans to sell 10.145% of its issued capital, amounting to Rs 1.9 billion, to eligible institutional investors and the general public. Following the institutional investors' purchase, the company obtained the board’s approval to issue 1,155,960 shares (60% of the total reserved for the public) to the general public. Of this, 10% (115,596 shares) were allocated for Nepalis working abroad. The company courted controversy as it tried to issue the shares to the Nepali’s living abroad starting July 11 as it tried to issue these shares to the general public at a price 10% lower than the institutional investors' purchase price, contrary to the regulations.

At the time institutional investors purchased the shares, the company had not accounted for potential liabilities owed to the Nepal Electricity Authority. The public invitation letter issued on January 16, 2024, prior to the share issuance to institutional investors, indicated an actual net worth per share of Rs 248.67 as of FY 2022/23. However, the revised invitation letter on July 3 of this year stated a net worth of Rs 242.5, showing a difference of Rs 6.62. Additionally, the company's earnings per share, initially reported as Rs 54.34 for FY 2079/80, fell to Rs 2.8 by mid-April after incorporating the potential liability to the Nepal Electricity Authority.

Experts noted that this drastic decline in earnings per share posed risks for both institutional investors who had already purchased shares and the general public planning to invest. According to SEBON, which was named as a defendant in the writ, the court accepted the board's position that the public issuance price—set at 10% below the cut-off price determined through the book-building method—was legally permissible. However, the court also emphasized that when there are significant differences between the prospectus issued to institutional investors and the revised prospectus for the general public, SEBON must act proactively and remain publicly accountable.

The Finance Committee's failure to address this aspect of the court ruling has raised concerns about its intentions. Previously, in July, the Public Accounts Committee had intervened by halting the IPO process and seeking clarification from SEBON.

Finance Committee Chairman Santosh Chalise clarified that the committee directed the board to comply with the court order regarding the IPO of Reliance Spinning Mills after conducting an investigation.

He explained that the committee made this decision based on complaints submitted to the committee and a study conducted by a three-member investigation team comprising Ganga Karki, Metmani Chaudhary, and Rankumari Balampaki Magar, which concluded that the IPO process should not be stopped.

A senior board official confirmed receipt of the Finance Committee's letter and mentioned that a decision was pending as the board chairman was abroad. The official noted that the board is proceeding cautiously, considering the potential risk of the book-building method failing in this IPO.

Reliance Spinning Mills had previously written to the SEBON, Finance Committee, and Public Accounts Committee before Tihar, requesting them to facilitate the IPO process. The board had already responded to the Finance Committee, stating that there were no objections to Reliance's IPO approval process. Institutional investors who purchased shares a year ago have also urged authorities to resolve the issue, claiming their investments have been held hostage for over a year.