KATHMANDU: The share price of Reliance Spinning Mills is likely to be a burden for general investors. The company is about to issue shares (IPO) at the rate of Rs 820.80 per share to the general public through the book-building method, but concerns have arisen that the price may be too high for investors due to a reported decrease in its actual net worth per share.

In the book-building method, qualified institutional investors buy a certain percentage of IPO shares at a fixed price, and this price is used as a basis for issuing shares to the general public. The company has already sold 40 percent of the total shares to qualified institutional investors at Rs 912 per share.

According to regulations, when institutional investors try to sell shares to the general public at a price 10 percent lower than their purchase price, the company's net worth per share should reflect this change. However, the company's net worth per share has decreased due to an outstanding electricity tariff liability of over Rs 753.68 million to the Nepal Electricity Authority, which was not accounted for when institutional investors bought the shares.

The company’s net worth per share as of the last fiscal year (FY 2079/80) is Rs 242.5. After deducting the electricity liabilities until mid-April, the auditor-certified net worth per share is Rs 179.45.

Nepal Stock Exchange (NEPSE), the secondary market operator of securities, sets the first trading price of the IPO from the company's actual net worth per share to three times that value. Consequently, the initial trading value of Reliance Spinning Mills' shares may be lower than the price determined through the book-building process, which worries investors. A group of investors has submitted a petition with complaints about this issue.

As of the end of the last year, the actual net worth per share is Rs 242.5, and the maximum price that can be maintained is Rs 726.15. Based on the net worth per share of Rs 179.45 as of mid-April, the maximum price would be Rs 538.35 when first listed. This indicates that investors may incur losses even at the initial listing price. Former Chairman of Nepal Investors Forum, Chhotelal Rauniyar, criticized the Securities Board of Nepal for granting IPO permission to the company, suggesting it was done without proper assessment and may harm investors.

Despite several companies waiting for IPO issuance, the board prioritized a company with weakened financial conditions due to electricity tariff arrears, causing dissatisfaction among investors. There is a possibility of manipulation as the shares might be traded at a lower price in the secondary market than the purchase price by institutional investors.

Reliance has permission to sell 1,155,960 shares worth Rs 9,488,811,968 to the general public, with a legal requirement to sell 10 percent of these shares to Nepalis employed abroad. From July 11, Nepalis abroad can apply to purchase a minimum of 50 shares and a maximum of 20,000 shares until July 25. Global IME Capital Limited is managing the share issuance and sales, with applications accepted through participating banks, financial institutions, and My Share online. Care Rating Nepal has rated the company Care NPA minus, indicating sufficient capacity to meet financial obligations on time.

This is the second time shares are being sold through the book-building method in Nepal, previously by Sarvottam Cements. Reliance Spinning Mills, operating since September 4, 1995, produces yarn, exporting 70 to 75 percent of its products to countries like India, Turkey, Vietnam, and the UK. Chairman Pawan Golyan holds 89.860 percent of shares, with 4.0056 percent owned by qualified institutional investors and 6.0084 percent by Nepalis employed abroad and other general public. After the issuance and distribution of all shares, the paid-up capital will be Rs 1.90 billion, with proceeds used for product diversification and industry capacity building.

Questionable Financial Statements

There are concerns about the financial statements released by the company. For the last year 2079/80, the company reported a profit of over Rs 927.8 million. However, as of mid-April this year, the profit shrank to a little over Rs 26.3 million. The company projects a profit of over Rs 40.62 million for the current year, which some experts view as unrealistic. Chartered Accountant Mukti Subedi noted that the actual financial situation typically changes only due to equity adjustments under the NFRS system. Despite attempts to contact Chairman Golyan for clarification, he was unavailable.