Reliance Spinning Mills Limited, currently embroiled in a controversy over its initial public offering (IPO), witnessed a significant increase in net profit during the second quarter of the current fiscal year.

A source close to the company revealed that it did not account for outstanding liabilities to the Nepal Electricity Authority (NEA) in its financial statements.

The IPO, initially issued to qualified institutional investors through a book-building process, did not consider this potential liability. The per-share price was determined based on the amount investors paid. However, when the financial statements were republished before the share issuance for Nepalis living abroad, the omission of the NEA liability sparked controversy, as the company’s financial position appeared weaker once the liability was included.

A company official stated that the second-quarter financial statements were prepared without factoring in potential liabilities, based on the company’s claim that it does not owe additional tolls for using dedicated and trunk lines from the NEA. The financial statements show that net profit surged by 275% compared to the end of the previous fiscal year (FY 2023/24).

Reliance Spinning Mills, which recorded a net profit of over Rs 53 million at the end of the last FY, earned more than Rs 188.8 million by the second quarter of this year. The company also reduced its financial expenses by over 48%, contributing to the sharp rise in net profit. While financial expenses stood at over Rs 472.6 million last year, they dropped to Rs 243.6 million this year.

The company’s operating income remains strong. It reported Rs 572.7 million in operating income last FY which reached Rs 455.6 million by the second quarter of the current fiscal year.

Earnings per share (EPS) for the second quarter rose sharply to Rs 22.19, up from Rs 2.95 at the end of the last FY. This improvement comes as the Securities Board of Nepal (SEBON) prepares to approve the continuation of the IPO process.

Following a directive from the Finance Committee of the House of Representatives to proceed with the IPO in line with the Patan High Court’s order, SEBON formed a four-member study committee led by Supervision Department Head Binaydev Acharya to facilitate the process. There are indications that a revised prospectus will need to be published again, as required by the court’s ruling.

The company had received approval to sell shares through the book-building method and had already allotted shares to qualified institutional investors in the first phase. It planned to issue shares to the public from June 24 but halted the process following SEBON’s directive.

On January 29, 2024, the company allotted 770,640 shares to qualified institutional investors at Rs 912 per share. Reliance intended to offer shares to the general public at a 10% lower price (Rs 820.80 per share). The company stated that the prolonged suspension of the IPO process is affecting its business.

Although it collected funds from institutional investors, the company had to place them in fixed deposits instead of using them for commercial operations.

Recently, a writ petition challenging the IPO was dismissed. Four individuals, including Hari Bahadur KC, had filed a petition at the Patan High Court on July 9, but the court dismissed it on November 6, clearing the way for the IPO process to resume. However, since the court order mandates a revised prospectus before shares can be sold to the public, the process can only move forward once this requirement is fulfilled.