The Securities Board of Nepal (SEBON) has released the “Guidelines for Review of Financial Statements Submitted for Preliminary Public Offering, 2082” under the special powers granted by Section 90 of the Securities Act, 2063.
This landmark guideline mandates an independent review (पुनरावलोकन वा जाँचबुझ) of financial statements by a qualified accounting expert in specific high-risk cases before a company can proceed with an IPO. The objective is crystal clear: enhance transparency, protect public investors, and ensure that only companies with credible and fairly presented financials are allowed to raise money from the capital market.
For promoters, CFOs, and companies planning to list on the Nepal Stock Exchange, these guidelines introduce a new layer of due diligence that will significantly raise the bar for IPO readiness.
When Must an Independent Review Be Conducted?
SEBON has defined clear, objective triggers. A review is required in the following situations:
1. General Criteria (applicable to all companies)
Last financial year (or interim) statements will be reviewed if:
- Trade receivables (or similar) exceed 75% of total sales revenue.
- Unpaid government taxes, duties or liabilities exist and, after adjustment, the company fails to meet IPO eligibility thresholds (net worth, profitability, etc.).
- Net worth falls to 50% or less of paid-up capital after adjusting contingent liabilities.
Last three financial years will be reviewed if:
- Related-party transactions with connected persons exceed 30% of fixed/business assets.
- Related-party transactions exceed 30% of average sales/expenses (government transactions excluded).
- Accounting policy changes or estimate revisions have boosted net worth/profit to meet IPO criteria.
- Auditor’s report contains qualifications that, if adjusted, would make the company ineligible.
- Restatements or prior-period adjustments have been made to qualify for IPO.
Combined or red-flag cases (last year + three years + interim) apply where multiple triggers exist, or where there are complaints, regulatory directives, suspected financial irregularities, or public events likely to materially affect the company’s financial position.
2. Sector-Specific Additional Triggers
- Manufacturing & Processing: Gross profit margin fluctuation >30% vs. previous two-year average; significant variance in interest/finance costs.
- Hotels & Tourism: Same margin and interest cost triggers + high receivables.
- Hydropower & Energy Infrastructure: Related-party spend >30% of project cost; IRR fluctuations under IFRIC-12; investment in other projects during main project construction.
- Investment Companies: High related-party exposure; investments outside permitted sectors; frequent changes in investment accounting policy.
3. Other Cases
- Public complaints or regulatory/government directives requiring scrutiny.
- Any other situation SEBON deems necessary.
Who Can Perform the Review? (Strict Eligibility)
Only highly experienced and independent professionals are allowed:
- Chartered Accountant with minimum 10 years experience, OR
- CA who has passed SEBON-recognised Forensic Accounting and Fraud Detection (FAED) examination + minimum 5 years experience.
- Must be a partner in a CA firm.
- No audit or consultancy relationship with the company in the last three years.
- Must submit a conflict-of-interest declaration confirming no relationship with the company or the issue manager.
What Does the Independent Expert Actually Review?
The scope is comprehensive and forensic in nature. The expert must:
- Verify related-party transactions at arm’s-length pricing.
- Assess reasonableness of accounting policy changes and estimate revisions.
- Test recoverability of receivables and adequacy of provisions.
- Evaluate going-concern assumptions and contingent liabilities.
- Scrutinize unusual or extraordinary income/expenses.
- Validate share-premium valuation methodology and assumptions.
- Analyse impact of auditor qualifications.
- Review compliance with all applicable laws (including Securities laws).
- Assess the reasonableness of projected financial statements against historical performance, industry conditions, and management capability.
- Provide adjusted financial statements along with a formal opinion.
The final report, including any required restatements, must be submitted directly to SEBON.
Role of the Issue Manager (Merchant Banker)
- Conduct initial due diligence and flag whether review is required.
- Recommend three eligible experts to SEBON.
- SEBON selects and appoints one.
- Company bears all costs of the review.
- Report must be submitted within 30 days (extendable by 10 days with justification).
Critical Disqualification
Companies whose latest audited financial statements carry an Adverse Opinion or Disclaimer Opinion are not eligible to apply for IPO.
What This Means for Your Company
These guidelines are a strong positive signal for the Nepali capital market. They:
- Reduce the risk of “window dressing” or aggressive accounting.
- Protect retail investors from over-valued or questionable IPOs.
- Increase credibility of companies that successfully clear the review process.
- Make IPO preparation more rigorous — but also more professional
