Stock Market

At a time when the generalinvestors are frantically searching for new scrip to invest in, Oriental Hotels Ltd. (OHL) is offering 12,500 units of its ordinary shares to the general public at par value of Rs. 100 per share. The amount of money (Rs. 125 million) that the issue will raise from the market, does look not so significant when compared to the public issue of Rs. 175 million by Nepal Industrial and Commercial Bank Ltd. some seven months back. But when looked in the context of the performance of some other hotel scrip in the secondary market, the presently offered issue seems to be important.

Among the ordinary shares of three hotel companies listed in the Nepal Stock Exchange, those of two hotels (Soaltee and Taragaon) are being actively traded – both at a premium. What is more remarkable is that the hotel of one of these two companies (Taragaon) is still to open, but the market price of its shares has already appreciated more than 50%. It indicates that investors have high confidence in the hotel industry. OHL’s hotel, Radisson Kathmandu, has been in operation for over eighteen months and the prospectus of the company claims that it has already recorded an operating profit during the nine months period ending on May, 2000. That means, the investors who buy the shares in the primary market now may hope for their shares to open at the secondary market at a similarly appreciated price.

However, OHL’s offer does not differ much from the normal trend in public issue of shares by Nepali companies. Only about 26% of the company’s total paid up capital (including 62,500 units reserved for the company employees) will be in the hands of general public, as the rest is all held by the promoters. Explaining the reason for such a low offer, B.K. Shrestha, Managing Director of the company says, "We are going according to the market trend." Observers regard this trend of offering a small fraction for the equity to the general public as guided by fear on the part of promoters that their company may be controlled by outsiders. The share-holding percentage is to be reflected also in the composition of the company’s Board of Directors. OHL prospectus shows that two seats in the Board are reserved for the public shareholders. The rest of the nine seats, including that of the Chairman, are reserved for the promoters.

A matter of concern for the people interested to buy the shares of a company is liquidity. The rules require that the allotment of shares be completed within 75 days of the closure of the public issue, and that the shares allotted be listed in the stock exchange within three months of the allotment. To meet these deadlines, companies in the past had faced difficulties, though in recent cases they have been able to meet the deadline. Shrestha says the company is targeting to complete the jobs even earlier: allotment within 30 days and listing within 75 days. "The required software for this is already in place", he informs. Sooner the shares are open for trading at the floor of the stock exchange, better it is for liquidity.

In previous public issue of shares, a point of major concern had been the time for which the company can hold the cash from the applicants without having to pay the interest on it. The point is of particular concern for those applicants who do not get shares allotted in their name if the applications exceed the offer. OHL has demanded only 50% of the amount as down payment. The remainder of the payment is to be called soon after the allotment is completed as stated in the prospectus. The reason: The promoters have already paid up for the shares they hold at present in the company. How much this provision will make the prospective investor hesitant to buy OHL shares will be seem only in the future.

Besides the strength of the promoters being experienced in tourism industry and the association of internationally reputed brand (Radisson), OHL is focusing also on some other features – both of the issue as well as of the hotel – to attract more investors to it. For example, the issue is underwritten by 21 institutions. This is the first time in Nepal that so many financial institutions have backed a public issue of shares. This is hoped to enhance the confidence of the prospective investors in the company. Shrestha says, for the collection of applications for the shares, the company has mobilized maxium number of finance companies so as to avoid the delay in the process due to possible over-crowding in commercial bank counters.

As of the strengths of the hotel, Shrestha points out towards its location. Most of the diplomatic missions in Kathmandu are located around Radisson Kathmandu’s premises and the main tourist centres are not far away.

These strengths are expected to help the hotel increase its occupancy. However, the company has forecast its financial performance on the basis of 60% occupancy and US$ 70 as average room rate in the first year (2000-01). The net profit expected is Rs. 0.32 million in the first year and 88.21 million in 2001-02 when the company expects to start paying dividend as forecast in the prospectus. If the forecasts come true, the shareholders can have 10% dividend in 2001-02, 20% 2002-03 and 30% in 2003-04. Since all the loans of the company are in Nepali rupee, while the revenue is to be in foreign currency, there is no risk of the profitability being negatively affected by any possible depreciation of Nepali rupee, point out the company sources.

Proxy : The Problem

The news that the shareholders attending the first annual general meeting of Taragaon Regency Hotels Ltd. at the convention hall, New Baneswor, Kathmandu broke out due to alleged mismanagement by the organizers, claimed banner headlines in the newspapers last month. Since the management was quoted as saying that the disturbance was due to the turnout of some unwanted people in the meeting, it seems that regulations and practices regarding attendance in a company’s general meeting need to be reviewed.

Out of about 42 thousand shareholders of the Taragaon Regency Hotels, about 10 thousand attended the meeting and that was a record. The disturbance caused heavy loss to the hotel as a number of computer sets were damaged. More serious was, however, the loss of image that the company suffered : a company in hospitality industry seemed to be inhospitable to its own shareholders. Before coming to such a harsh conclusion, one vital question needs to be attended to. Were the attending people were actual shareholders of the hotel?

One reason for the problem seems to be related to proxy, that allows another person to attend a general meeting of a company and to vote on behalf of the shareholder.

Section 58 (1) of Companies Act, 2053 specifies the conditions under which a proxy can be given. According to the section, any shareholder who is unable to attend a general meeting can give a proxy to any other shareholders of the same company in a prescribed format to attend the meeting and vote on behalf of the shareholder who gives the proxy. The most relevant act for this matter would have been the Securities Exchange Act, but it is quite silent in this regard.

As the practice goes in Nepal, a shareholder who had already given proxy to another shareholder wants to attend the general meeting, he or she is allowed to do so on the condition that he/she does not take part in the voting. Moreover, any persons bearing a share certificate is allowed to attend the meeting, because normally the companies do not keep the signature specimens of the shareholders at the venue of the meeting. Therefore, there is no means to verify whether the bearer of the share certificate is a genuine shareholder of the company or not. Thus, there is every chance of unexpected turnout at a general meeting.

Similarly there is no rule regarding attendance of a minor at an AGM. Shareholders who have shares also in the name of minors, bring share certificate of the minors with them, thus making double presence - first as a shareholder and again as the guardian of the minor shareholder. So the physical presence of one person is recorded as a presence of more than one person.

That is why we have many reasons to doubt whether the number of attendance recorded in Taragaon’s AGM was of real shareholders.

It was observed that some persons were collecting proxy even before twelve months of the date of AGM. Such practice is against natural law of justice. The proxy givers had no clear reason to believe that they could not attend the meeting which was to take place at such a distant future.

Therefore, the need of the hour is to frame a comprehensive rule with regard to proxy and also for the selection and election of public director and their qualifications.

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Radisson

Going Public

Proxy : The Problem