Local Shares in Hydropower : Developers Dilemma Kumar Pandey Vice President IPPAN January 23, 2017
Objective of issuing public shares Accumulate scattered wealth and put to use for infrastructure development Promote local ownership Allow for employees to benefit Reward HP companies based on their performance and management High market capitalization New funds for new projects
Governmental policies On IPO (General requirements as other sector) 25 % of total shares to be distributed to public at par value 10 % to locals 2 % to employees 13 % IPO For FPO or Rights Issue Financial and Strategic Plan regarding the uses of money collected Rights Issuance allowed two years after IPO Submit Financial Closure or Letter of Intent from financial institution All approvals or consent required for license, PPA, IEE/EIA etc. Have access to land required Have initiated construction works.
Hydropower companies are unique BOOT projects Projects transferred to government after license period at ZERO Value Very few employees during operation 2 % shares could be difficult for employees to subscribe Capital intensive: Huge capital required Local public may not be able to purchase 10 % of shares Risk VERY high at the beginning and minimized after construction: Concept of Risk and Return Extensive cost over run and time overrun observed in project development Very little reward for partial completion Single buyer industry Potentially serious market risk exist
Vital Data on HP Companies (as of 22/1/2017) Total number of traded companies: 11 Total paid up capital : << Rs. 20.3 Bn Total market capitalization of HP Comp: Rs. 76 Bn Total NEPSE Capitalization: Rs. 169 Bn Percentage of total NEPSE capitalization: 5 % New shares being distributed : + N. Rs. 700 Mn
Trends in HP shares allotment HUGE LINES to gets some shares in HP companies Over subscription Khanikhola over subscribed 73 times HIDCL over subscribed: 21.5 times Barun Hydro over subscribed 61 times Share allocation by lottery Companies deliberately diluting shares among public: so no large shareholder Shareholders eager to sell as soon as IPO process is complete at a premium
Observation of present trends Extremely high enthusiasm among public investors Not enough study in the returns and risks associated : Some risky investments Promoters deliberately ensuring that no public shareholder has bulk share, easier at AGMs Shareholders not really investing long term, just seeking short term premium.
Grievances against publicly traded hydropower companies Lack of corporate governance and weak compliance Lack of effective and independent regulatory body Confusion among investors about ownership transfer to government after certain period of operation of hydropower project. Investment Centered on Capital Gain Rather than Company Returns Divestment after lock in period burdens company Divestment by promoters leads to faceless company
National Hydro Power Company experience NHPC owned Indrawati 3 Project (7.5 MW) was commissioned 14 years ago 1:1 rights shares issued to invest in new project (Lower Indrawati) through SHPC All promoter shares converted to tradable ordinary shares (cancelled promoter group) The new project did not materialize (cancelled) Share price crashed as low as Rs. 36 per share Shareholders of NHPC have not receive dividends yet!!!
Lesson to learn from NHPC Need to ensure Developer s ability to properly utilize raised funds Need a regulator in the sector Need to educate public Not all hydro projects are the same: risks and returns vary (promoter s can also be a risk) If all shares are held by the public, who is actually responsible for the Company/Project?
Developer s dilemma: Investment and risks Maximum risk at the beginning of the project Risk is minimized with each project milestone and minimal at the time of generation Capital required at the beginning of the project Dilemma: should funds from public be raised at the beginning of the project (high risk, high requirements, should public be made to face these risks) Going public early puts compliance pressure on company: should this be avoided during construction? Should public be asked to pay a premium if they are investing late in the project cycle? Should local public and general public be treated equally or differently with regards to exposure to risk
Conclusion IPO a good way to raise capital if done properly Public shares will ensure local ownership Regulator is a necessity to ensure developers are properly utilizing public funds Public needs to be educated regarding hydro shares and return of ownership to government Promoter s ability to sell out shares: the prospects of a faceless company is highly risky Policy differentiating local and general public with exposure to risk taken by promoters is required Policy makers should not assume that the public funds are available for long term hydro development, the enthusiasm is for short term premiums only.