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)
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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.