The government's recent 'Economic Reform Implementation Action Plan-2082, based on recommendations from the High-Level Economic Reform Recommendation Commission, has stirred debate within Nepal's hydropower sector. One of the contentious points being that Hydropower companies will only be allowed to issue Initial Public Offerings (IPO) shares after they start production.
While perhaps well intended for safeguarding public investors, this could discourage the developers and hydropower companies who already meet a comprehensive checklist of financial and operational milestones before issuing an IPO. This article examines the ripple effect of the new rule and its amplifications on the developers and the economy.
The Current IPO Landscape in Hydropower Sector
While it is not mandatory for a project company to issue IPO, the law doesn't prescribe the timeline for the IPO exception being predominant on projects which are negotiated with the Government of Nepal by way of Project Development Agreement (PDA)- where, the PDA generally has a provision requiring the project company to allocate shares for the project affected population. In such exceptional situations, the issuance of IPO is mandatory and within the timeline as set in the relevant project development agreement.
According to the current legal provisions, the issued capital of the company must not be less than 10% and more than 49%. The laws have also specified the allocation to percentage of these companies: 10% of the shares are to be publically issued to Foreign Employment. 10% of equity shares are to be distributed to the project affected local people and upto 2 to 5% to the employees of the company depending on the number of the employees.
The current structure promotes both a sense of ownership among the stakeholders and also facilitates smoother implementation on the ground by generating local support and goodwill. These factors have contributed for smooth project implementation.
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The capital model of hydropower of Nepal predominantly follows a debt-to-equity ratio of 70:30 or 75:25. The project is only financed after completing a series of requirements placed by the banks for loan secureal. Banks, often through consortiums, provide the capital in tranches, only after checking rigorous financial, technical and commercial viability of the project. Key prerequisites include having an intact PPA, up to date licenses and legal compliances among others.
Due to the long gestation period and capital-intensive nature of these projects, developers often face significant financial pressure. Interest begins to accumulate from the initial loan disbursement, well before the project starts generating revenue. For developers, especially those lacking access to large-scale private funding, an IPO has served as a critical tool to raise equity capital during construction, alleviating some burden and boosting investors' confidence.
Unlike other industries where IPOs are raised after a company reaches operational maturity, hydropower development is front loaded, with the major capital expenditure occuring during the construction phase. Once the physical structure is built, there is little room for further expansion, as the technical parameters are fixed. Hence, expecting companies to issue IPOs post-production seems implausible as it defects the very purpose of public equity in this sector.
Regulatory Requirements
With the momentum of hydropower sector, the government frequently comes up with tightening noose of the hydropower developers. Before applying to SEBON, the project company is to obtain a clean pass from the Electricity Regulatory Commission, which has a more comprehensive checklist than that of SEBON.
These include completing the majority of project construction, securing full financial closure, meeting profit benchmarks, acquiring all required land, and ensuring grid connectivity. Developers must also submit multi-year financial reports and commit to using IPO proceeds only for project completion or debt repayment.
Why the New Rule Discourages Developers
The current rule undermines the fundamental purpose of public share offerings, which is to mobilize equity capital from investors, either to fund project completion or reduce debt burdens. Developers already adhere to strict compliance and governance standards before approaching the public markets. Placing additional restrictions on the timing of IPOs only aggravate the challenges they face.
For many energy companies, the IPO route is not a privilege but a necessity. The public equity model not only distributes ownership more broadly but also helps bridge the financing gap during critical phases of construction. Especially for mid-sized or smaller developers, access to equity capital often determines whether a project moves forward or stalls. A hydropower’s development trajectory is substantially altered by the substantial cash available. As delays can be financially debilitating, developers are often compelled to adopt faster, albeit more expensive construction methods- recognizing that the cost of delay often outweighs expedited cost.
The urgency to complete hydropower projects efficiently is further amplified by Nepal’s Public Private Partnership model “BOOT (Build, Own, Operate, Transfer)”. Under this framework, private developers must eventually transfer ownership of the project back to the government (in good operating conditions) after a fixed term (35 years for domestic market and 30 years for FDI projects). As a result, developers are naturally incentivized to accelerate construction and begin revenue generation as early as possible to maximize returns within the limited operational window which will ultimately benefit relevant stakeholders including both public and government.
The Need for Supportive Policy
In practice, the hydropowers face the issue of capital raise during the construction as many uncertainties lie within the projects, mostly natural calamities and bureaucratic hurdles. The government's long-term vision for capital market development must prioritize strategic, long-horizon investment models, rather than short-term trading. Hydropower by its nature requires patient capital. Paying interest on substantial capital until revenue generation through equity seems an undue burden on developers. Over-leveraging due to the lack of equity access could deteriorate the rate of return, making projects financially fragile.
Public participation through IPOs has historically played a vital role in fostering local support for hydropower projects. Once shares are offered to the public, particularly to those in project-affected areas, communities tend to feel a sense of ownership and optimism regarding project completion, after acquiring the shares. This often translates into smoother implementation and fewer social hurdles on the ground.
However, by restricting IPO issuance until after revenue generation, the burden of development appears to be shifting entirely onto developers, sidelining the importance of public engagement and shared responsibility. In reality, successful project delivery relies not just on financial and technical capacity but also on community cooperation. Ignoring this dynamic risk creates greater resistance at the local level.
Ultimately, this regulatory shift may discourage the participation of private and shrink future investment in the hydropower sector. At a time when Nepal needs more public participation for building energy infrastructure to fulfil demand and commitments to export, policies must be guided and designed to enable developers while strengthening community collaboration and financial inclusion.
The author is an advocate involved in Nepal's energy and investment sector.
