Investment Fundamentals

Understanding Initial Public Offerings (IPO) & Dividends Distribution in Nepal!

by Khatapana

Jan 11, 2023 - 6 min read

Understanding Initial Public Offerings (IPO) & Dividends Distribution in Nepal!

Have you ever applied for the IPO? Never heard of it? Don’t worry here is a brief overview about the much talked about stock market terms in Nepal. 

What is an IPO?

An initial public offering (IPO) is the process by which a privately-held company makes its shares available for purchase to the general public on a stock exchange. This is typically done to raise capital for the company & expand its operations.Overall, the IPO process allows a privately-held company to become publicly traded, providing it with access to a much larger pool of potential investors and capital.

How can you apply for an IPO ? 

To apply for an IPO, you will first need a Bank Account in your name. After opening a bank account, you can then proceed to open a DEMAT account from a Depository Participant (DP) (Generally, Banks & Brokers are DP). A dematerialization (DEMAT ) account is a type of account that is used to hold securities in electronic form rather than in physical form. Once you have opened a bank account and a demat account, you can then fill out the C-ASBA form. The C-ASBA number (also known as CRN number)  is required to apply for shares during an IPO.

If you wish to apply for an IPO online, you also need to fill out a meroshare form. After this, you will be provided with a meroshare Id & password. You can now finally apply for an IPO online via meroshare mobile application or its website.

How do IPO investors make money?

IPO investors can earn money in a few different ways. One way is to hold onto their shares of the company's stock and wait for the stock to increase in value over time. This is known as a "buy and hold" strategy, and it can be a good option for long-term investors who are willing to wait for the company's stock to appreciate. 

Alternatively, investors can try to earn money by actively trading the company's stock, buying and selling shares based on changes in the stock's price and market conditions. This can be a more risky approach, but it can also potentially generate higher returns. 

Additionally, IPO investors may be able to earn money through dividends, which are payments made by the company to its shareholders. Some companies choose to distribute a portion of their profits to shareholders in the form of dividends.

What is the dividend?

Dividend is a distribution of the company's profits, and it is paid out on a regular basis, such as quarterly or annually. Dividends can provide investors with a regular source of income, and they can also be a sign that the company is financially healthy and performing well. Not all companies pay dividends, and the amount of a dividend can vary depending on a number of factors, such as the company's profits and its financial goals.

Forms of dividend distribution:

Dividends can be paid out in a few different forms. Each company may have their own policy of distributing dividends which is also called dividend policy. Here are the most common forms of dividend distribution:

Cash Dividends

The most common form of dividend is a cash payment, which is simply a distribution of the company's profits to shareholders in the form of money. This cash can be paid directly to shareholders, or it can be deposited into their brokerage accounts.

Stock Dividends 

Some companies may also offer dividends in the form of additional shares of stock, known as stock dividends. This means that instead of receiving a cash payment, shareholders will receive additional shares of the company's stock. These shares can then be sold for cash if the shareholder chooses.

Property Dividend

Another form of dividend is a property dividend, which is a distribution of the company's assets, such as real estate or equipment, to shareholders. This is less common than cash or stock dividends.

Process of Dividend Declaration and Distribution

The process of declaring a dividend typically involves several steps. First, the company's board of directors must decide to pay a dividend and determine the amount of the dividend. This decision is typically based on the company's financial performance and its financial goals. The board of directors will then approve the dividend and announce it to the shareholders. This announcement will typically include the percentage of dividend,total amount of dividend, the date it will be paid, and the date on which  shareholders must be registered in order to receive the dividend. After the dividend is declared, it shall be distributed only after shareholders’ approval from the general meeting of the company. Cash dividends can be approved by ordinary resolution(approval by more than 50% shareholders) however bonus shares are to be distributed only after passing Special Resolution(approval by at least 75% shareholders). It is to be noted that the rates of dividends to be distributed after the approval from AGM shall not exceed the rate fixed by directors. Now, the dividends are distributed to the shareholders either by sending out cheques, depositing dividends on the bank account of shareholders or crediting bonus shares to the shareholders. This  process can vary depending on the company and its policies. 

Legal Provisions related to Dividends in Nepal

The Company Act, 2063 governs the dividend in Nepal by its Section 182.

Circumstances in which Dividend is not distributed:

The dividend needs to be distributed to its shareholders within 45 days after the date of approval by the general meeting . However, there are certain exceptions to it:

a) when a law prohibits

b) when the right to receive dividend is subject to any dispute.

c) if there are any circumstances beyond the control of the company or for any reason, dividend cannot be distributed within the said time.

What happens if the company fails to distribute dividends on the said time?

If the company fails to distribute dividend in the time limits then, the company has to distribute the dividend together with the interest thereon at such rate as prescribed.(prevailing market interest rate). 

What happens when shareholders die or can’t go to collect the dividends?

The legal heirs of the shareholders whose name has been registered in the shareholders register during the declaration of dividend can collect the dividend with the application and other legal evidence of being legal heirs of shareholders.

Responsibilities of a company:

A company shall only distribute dividend out of the amount of profits set aside for the distribution of dividend. Before paying or declaring a dividend for any financial year, a company has to fully deduct the following amounts from its profit.

  1. Preoperative expenses(i.e. expenses incurred before the incorporation of companies like legal fees, research & development expenses etc.)
  2. Accumulated losses in the previous years.
  3. Any other amount required to be paid or set aside out of the profits under the prevailing law(Eg. income taxes) 
  4. If the prevailing law requires the establishment of a reserve or consolidated fund of any amount prior to distributing dividend, any company which is required to comply with such legal requirement shall not distribute dividend without establishing such reserve or consolidated fund.(Eg. Banking & Financial Companies are required to set aside 20% of their profit to General Reserve Fund before distributing dividends. )

What happens if no-one claims the dividend?

If the amount of dividend remains unclaimed by any shareholder even after the expiry of a period of five years from the date of resolution adopted by the general meeting of the company to distribute dividend, such dividend shall be credited to the investor protection fund to be established under Section 183. But before that, a company has to publish a notice in a national-level daily newspaper inviting the concerned to receive the dividend, within the time limit of at least one-month.

Investor protection fund will be managed by representatives from OCR,SEBON & NEPSE for the improvement of the capital market, investment policy, companies law or law relating to trade, business and profession, training to the employees of the Office or the company or in any other activity relating to the company administration.

Taxation of dividends

5% of tax is levied on the dividend as per Income Tax Act of Nepal, 2058 which is a Final Withholding Tax. So, you are only entitled to receive 95% of the total dividend declared by the company. 

What if the Board of Directors decide not to distribute dividends?

Receiving a dividend is the right of each and every shareholder. So, when a company calls for the AGM (Annual General Meeting), the shareholders can always ask for their portion of the profit sharing of the company in the form of dividend.

Dividend policy of majorities of Nepalese Companies is unclear and uncertain. Despite seeing a lower rate of return on their investments, many companies are choosing to reinvest their profits back into their own businesses rather than sharing it with shareholders. So, knowing about their own rights and being conscious enough, shareholders will themselves need to keep on checking the company they have invested in.

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