The week before last we witnessed heavy over-subscription to the shares of a finance company. The company was looking for something on the order of Rs 25 million from the public, but there were applications for more than thirty times that amount. Yes, it was a good company but why should a firm be penalised for being good? Let me explain: The company will now end up spending over a quarter of the issue amount on handling charges and fees to deal with the overwhelming applications and the refund of the extra funds. The over-subscription happened because of excess liquidity in the market, which made it easy to finance such applications. Now the company must start the tedious process of using all the random number formulae imaginable in making a judicious allotment of shares.
A couple of weeks ago this Beed wrote about Nepal's understanding of the corporate world (Shareholding Nepali style, #25). Companies are an inherently capitalistic concept and you simply can't impose socialism on them and expect anything to then function as it should. The allotment process for this company now means that over ten thousand individuals will have to be provided with at least some shares. What does this mean to the company?
Say it spends only Rs 100 a year on every shareholder, on such essentials like mailing them the annual accounts and minutes, recording transactions and other administrative costs. Now multiply that by ten thousand-it will spend close to Rs 1 million. Of course, this isn't a problem for larger companies, but smaller ones will certainly feel the pinch. There is some truth after all in the old accountants' maxim-if a public company reports profits and would like to share them with its shareholders, it would swiftly run up losses-it would have to print thousands of copies of the accounts.
It is time we re-evaluated the necessity of widespread public holding of companies. Does every promoter who has brilliant ideas about banking, finance or insurance have to share the proceeds with the public, and that on such a large scale? The theory of dispersed public holding may be perfect for state enterprises which are effectively owned by the public anyway, but not for private enterprise. The perils of going public are so high that right now no successful private company would like its shares listed or traded. The Companies Act and all the other Acts that make public holding compulsory need amendment. The concept of a joint-stock company needs to be understood, and it should be up to companies to decide how they want the public to participate in their activities. There is really no point in the State defining the manner of public participation, whether in terms of the number of shareholders or the way in which shares are subscribed to.
The fundamental issue here is to recognise and understand that shares can come in various forms. It isn't necessary that the public participate in the way equity shareholders do, with the same voting rights and dividends. There could be shares that have no voting rights, but be entitled to higher dividends or shares with voting rights which receive lesser dividends. There are shares that may have a guaranteed fixed amount of returns, and shares with various options on convertibility. Financial re-engineering is a creative endeavour worldwide. There's no reason it shouldn't start to be in Nepal, too. Financially sound companies should be allowed to raise money without the Securities Board or the Stock Exchange dictating how many shareholders they should have.
Post-liberalisation we have been testing all the Acts pertaining to companies. It's been a long-time and the learning curve is surely complete by now. Let's move on swiftly and make changes that benefit companies and provide much-needed impetus to the Nepali capital market.
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