The Securities Board of Nepal (SEBON) has imposed stricter requirements for companies seeking to launch Initial Public Offerings (IPOs), with a focus on those with poor financial conditions or dubious accounting practices. Companies that demonstrate chronic losses, low net worth, or evidence of financial manipulation will be subjected to mandatory third-party audits before being approved to go public. If a company's net worth falls below half of its paid-up capital after adjustments, its financials will be independently audited. If more than 75% of revenue is in the form of loans or receivables, the board will suspect a problem and take action. Transactions involving related parties, abrupt changes in accounting procedures, or gains derived from non-operating income will also prompt further scrutiny. These measures are expected to end the days of presenting poor balance sheets and sneaking through the IPO door. This tightening did not occur out of thin air. It comes after years of silent protests and serious repercussions. Too many firms with weak foundations were able to attract public funds, only to leave small investors with shares that looked better on paper than in reality.
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Promoters profited handsomely, while retail investors learned hard lessons. Meanwhile, regulators have gained a reputation for being either too trusting or too hesitant to act. The underlying issue has always been information imbalance. Promoters understand the true status of their businesses, while investors rely on reported figures and regulatory clearance as indicators of reliability. When that signal becomes unreliable, the entire market begins to suffer. Trust, once lost, does not return simply because a new rule is introduced. SEBON's move recognizes this disparity. By requiring external audits and raising clear red flags, the regulator is attempting to reinstate a fundamental principle: only financially healthy and transparent enterprises should have access to public funding. It also sends a message to promoters who have viewed IPOs as an exit strategy rather than a growth opportunity. However, written regulations do not solve behavioural problems on their own. Enforcement will determine whether this change is meaningful or becomes part of the long history of well-written but poorly executed rules. Independent audits might become a formality if auditors lack accountability or face undue pressure. Companies can still find ingenious ways to manipulate figures unless oversight is consistent and technically robust.
The market also requires that investors have a better understanding of companies' financial health and how the capital market functions. Many retail investors view IPOs as guaranteed profit opportunities, sometimes ignoring fundamentals entirely. This attitude allows both strong and weak firms that secure approval to generate high returns. Tightening the noose on IPO issuance without improving investor judgment will not fully address the problem. Meanwhile, authorities should build on this opportunity introduced by SEBON. For instance, SEBON could create a public risk-rating system for IPO-bound firms, making financial health easier to assess for average investors. Strong sanctions for misreporting should not only result in disqualification but also carry legal and financial consequences for the promoters and auditors involved. Coordination with tax authorities and financial intelligence units can help cross-check data rather than relying solely on submitted reports. Nepal's capital market does not need more listings; it needs credible ones. Tightening the noose is a real start. However, authorities must ensure that such strong measures are implemented without suffocating legitimate firms.
