Financial Statement Review Standards

Financial statements submitted by companies during the public issuance process shall be subject to review or examination based on the following criteria:

1.1 General Standards

1.1.1 — Review of Last Fiscal Year’s Audited / Interim Unaudited Financials triggered when:

• Trade receivables exceed 75% of total sales revenue.
• Pending taxes/duties to Government, when adjusted, cause the company to fail IPO financial thresholds (net worth, net profit, etc.).
• Pending government dues, when adjusted, reduce net worth to less than 50% of paid-up capital.

1.1.2 — Review of Last 3 Years’ Audited Financials triggered when:

• Transactions related to core/fixed assets with related parties are 30% or more of total asset value.
• Accounting policies or estimates changed (without regulator direction) and the change helps meet IPO thresholds that would otherwise not be met.
• Average related-party revenue over 3 years exceeds 30% of average business income (excluding government transactions).
• Non-operating income or reserve funds (other than P&L transfers) used to meet IPO financial thresholds.
• Auditor qualifications/caveats exist and adjusting for those amounts causes threshold failure.
• Financial statements were restated (not for audit correction) and restatement helped meet thresholds.
• Prior period errors in equity were adjusted and helped meet IPO thresholds.

1.1.3 — Comprehensive Review (All 3 Years + Interim) triggered when:

• Combining conditions under 1.1.1 and 1.1.2, the company still fails IPO financial thresholds.
• Conditions under 1.1.1 and 1.1.2 are present in the most recent interim unaudited financials.
• Signs of non-compliance with law, financial crime, fraud, or publicly known events materially affecting the company’s financial position — or when the issue manager deems a review necessary.

Sector-Specific Standards

In addition to General Standards (Section 1.1), the following sector-specific triggers apply:

Other Trigger Conditions

Beyond Sections 1 and 2, the following also trigger a mandatory review:

• Complaints or grievances received regarding the company’s financials where preliminary review indicates the need for examination.
• Direction given by the Government of Nepal, Constitutional bodies, or Parliamentary committees for an audit or inquiry.
• Any other situation as deemed appropriate by the SEBON Board.

Qualifications of the Financial Expert

The appointed reviewing expert must meet ALL of the following qualifications:

• CA with 10+ years experience holding an ICAN professional certificate; OR a CA with ICAN FAFD (Forensic Accounting & Fraud Detection) certificate and minimum 5 years experience.
• Must be a partner of a CA firm (not a salaried employee or sole practitioner).
• Must not have provided audit or financial advisory services to the concerned company in the last 3 years.
• Must submit a written self-declaration of no Conflict of Interest with the company, issue manager, or underwriter.

Duties of Expert & Issue Manager

5.1 Duties of the Financial Expert

• Analyze which conditions under Section 1 apply to the subject company.
• Review all related party transactions in last 3 years for Arm’s Length Price compliance.
• Examine changes in accounting policies and estimates for justification.
• Test cash/bank balances of debtors and creditors; verify adequacy of adjustments.
• Review potential contingent liabilities affecting Going Concern.
• Scrutinize unusual/extraordinary transactions and verify arm’s length nature.
• Verify share valuation basis for premium issues complies with securities law; test assumptions used.
• Analyze auditor qualifications/caveats in last 3 years and assess financial impact.
• Analyze revenues, expenses, assets, and liabilities for the last 3 fiscal years.
• Verify legal compliance with applicable laws including securities laws.
• Review Projected Financial Statements for reasonableness of assumptions.
• Maintain strict confidentiality of all documents and information obtained.
• Submit report within 30 days of appointment (extendable by up to 10 days with prior notice).

5.2 Duties of the Issue Manager

• Submit a point-by-point Due Diligence Certificate with the IPO application.
• Nominate 3 qualified experts from ICAN’s approved list to SEBON; SEBON selects one.
• Provide full cooperation — documents, information, and site access — to the appointed expert.
• All expert fees and expenses shall be borne by the company itself.

IPO Financial Thresholds — Official SEBON Sources

6.1 Public Float — Minimum Issuance Percentage (Rule 9(1))

• IPO must be not less than 10% and not more than 49% of issued capital (unless regulatory authority specifies otherwise).
• Up to 10% of IPO shares may be reserved for residents of the project-affected area (Rule 9(4)).

6.2 Pre-Conditions for IPO — All Companies (Rule 9(3))

6.3 Special Provisions — Hydropower Companies (Rule 9a)

Hydropower companies where Government of Nepal holds ≥51% equity may issue IPO shares under a Government-approved program if:

• Conditions (a), (b), (c), (f), (g), and (k) of Rule 9(3) are fulfilled,
• A detailed design report OR official document with total cost estimate and construction period is prepared,
• At least 10% of promoter-agreed capital is paid up,
• Financial closure is achieved OR a Letter of Intent (LOI) for financial closure is obtained.

6.4 Credit Rating Requirement (Rule 9b + Guidelines Rule 3(2a))

• Every company must obtain a credit rating from a recognized agency before applying for IPO.
• Rating must be at least one grade above the minimum grade (as per Guidelines Rule 3(2a)).
• The credit rating result must be published in the prospectus before issuance.

6.5 FPO (Further Public Offering) Eligibility (Rule 14(2))

• Must have earned net profit in at least 3 of the last 5 fiscal years AND net worth per share must exceed face value.
• At least 3 years must have elapsed since the IPO.
• AGM resolution must have approved the FPO.
• Premium pricing must include full valuation methodology disclosure.
• Shares must be underwritten; prospectus must be approved by SEBON.

6.6 Banking, Financial & Insurance Institutions (Rule 9(2))

• Must have completed at least 1 full fiscal year of operations under stated objectives.
• Must have published audited financial statements for that fiscal year.
• Must have held an AGM.

6.7 Director & Shareholder Blacklist Restriction (Rule 9(2a))

• Neither directors nor shareholders holding 1% or more of shares may be on the Credit Information Centre (CIC) blacklist at the time of IPO application.

6.8 Employee Share Allocation (Rule 5, Guidelines 2074 — 9th & 10th Amendment)

6.9 NRN (Non-Resident Nepali) Share Allocation (Rule 4b, Guidelines)

• 10% of IPO shares must be set aside for Non-Resident Nepalis (NRNs) with government-approved labor permits abroad.
• NRN must have accumulated at least NPR 50,000 in a Remittance Savings Account in the last 6 months.
• Payment through Remittance Savings Account at an ASBA-member bank only.
• Unsold NRN shares are added to the general public offering.

6.10 Subscription Period (Rule 10, Regulation 2073)

• Minimum subscription open period: 4 working days.
• If all shares not sold, may extend for up to 15 additional days (with SEBON notification).
• For affected-area reserved shares: minimum 15 days, maximum 30 days.