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Why Every IPO is Heavily Oversubscribed ?

Published by Octron on July 9, 2009

Ranked as one of the poorest countries in the South Asia Region, Nepal has potential to change economical picture of the country. With recent IPO oversubscriptions it has already hinted, Nepalese does not lack funds for any kind of project. With more than 50 Billion Rupees already out of civilians pocket in IPOs (within a month) the people are still eager to apply for forthcoming IPOs.

Believe me, that too will be oversubscribed!

So, where does this money come from?
& why are IPOs always heavily oversubscribed?

The answer to the first question, where does the money come from is pretty simple – Remittance.

Nepal, on its own doesn’t have much of so called industry. It’s not just luxurious goods and state of the art gadgets, even for daily commodities like wheat grain Nepali is dependent upon its neighboring countries. Nepal also doesn’t have any primary export goods; it does capture negligible percentage of world market in Carpets, Garments, Handicrafts, and Artwork & Statutes. The major flow of cash comes from Remittance & Tourist who come to travel around this Mountainous Himalayan Kingdom.

According to recent report from Ministry of Labor, Foreign Affairs; Nepal occupies more than 40% of low level skilled manpower exported every year to India, Korea, Malaysia & Gulf countries like (UAE, Qatar, UAE, Iraq, etc). According to economic journals, Nepal is believed to be sustaining on the cash inflow from these outsourced people income. There is also some contribution form people who went to study and work in developed countries like Australia, USA & UK. The lack of investment opportunity in the country and heavy inward cash flow just brings in Inflation & huge surplus deposits in Banks.

So, where do people invest such huge sum of money in Nepal?

Nepal lack sound education system, which would enable the college graduates to do something on their own. The student who achieves ‘A’ grade in their university cannot write a single line of code when tested for some practical application development. It’s not just the education system, the country itself cannot provide required infrastructure for any student to try their hand on real practical situation during their studies itself. This is one reason for fresh college & high school students to flee aboard.

Industry, there are hardly any big ones running. Due to constant political conflict, riots, energy crisis, extortion made this country habitat for outlawed. How can big industry sustain in such crisis and political riot ? The government never paid heed upon business organizations, industry owners request for stability and peace in the country. All they gave were promises & we all know how easily they were broken in the name of communal riots, human rights, political clash, etc. Due to prolonged industry labor strikes making unnecessary demands, extortion from different party affiliated groups most businessmen were forced to close down their shops & flee to India. So, starting Industry facing numerous pressure like extortion, labor union, electricity crisis, etc doesn’t seem profitable business.

Even small business houses & sole proprietorships are difficult to run in Nepal. Due to lack of diligent candidates (bright ones are already offshore in the name of further education, permanent residence, etc) in order to run a small company is also difficult in the country. Human resource is just the tip of the iceberg, different extortion group keeps on knocking on the office doors for their share of the pie (mostly the complete pie). The ongoing political turmoil, regular bandhs & chakkajams, load-shedding just adds too much overhead on the business owners. 9 out 10 business fails in Nepal, within first year itself. Out of those remaining, 9 out of the 10 fail within next 2 years in Nepal. So you can imagine how dreadful the condition is for small businessmen in the country.

Agriculture was thought as boon for many people who were laid off from offshore low level skill work due to recent global recession. It required minimum knowledge and skill, but alas !

Due to frequent internal conflict between different groups of parties’ national highway get obstructed every now and then. In name of protest against the ruling parties, communal clash, religious conflict, etc these roads get blocked for even weeks. Even a minor accident in the road, brings down complete highway to standstill. The daily commodities like vegetables, fruits, milk, bread etc which people grew & produced with their blood and sweat gets turned into waste during the transit due to this blockade. So, even agriculture is not fruitful!

Real state, one of the most soaring businesses Nepal quite recently, due to excessive cash and enormous buying power people are paying like golden goose for prime commercial plots. Lands, which used to quote for some million rupees is today worth Billions. People say, if you have a house nearby the city (capital) then you are already a Crorepati (Multi-Millionaire). But in recent days, due to strict government policies to have to show the income source during land registration process, plus increase of extortion cases related to wealthy land lords, people are bit set back to buy expensive plots. Apart from these outlawed people, there is also frequent change in tax system, strict tax laws which discourages people to spend huge amount in buying such assets.

So, finally it rounds up to IPO. IPO is the only option people have for investment without any kind of legal hassles (unlike Real Estate), extortion threat (Sole proprietorship, business) nor does it require knowledge of rocket scientist to apply & sell it. Unlike other business ventures, as the shareholder, the person will be liable only the share he/she has bought for. Even a company faces problem like afore mentioned, share holders will be hardly affected, and there is always an option to sell off those shares. Even the companies collapses, the share holder will only lose the amount he/she has invested in those share nothing more.

Also, there are only few cases, where any company share reached below the IPO price (unless bankrupt, liquidated). Generally, the share price reaches 3-5 times of the IPO price on the first day of its trading in stock market. IPO has become money magnet for people how already have money. Due to its high margin of profit, people pawn everything they have just to apply for an IPO.

As long as the country completely eradicates outlawed situation in the country, provide firm support for business houses in terms of tax cuts, energy crisis backup, security & safety guarantee against political turmoil – IPO might be the only way for civilians to invest in a company. Definitely, if the current political uncertainty situation gets prolonged, the IPO oversubscription will just get bigger and bigger!

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