Image: Reuters/Kedar Shiwakoti
Founders are supposed to believe in the companies they create. In Nepal’s hydropower sector, they behave more like speculators.
The pattern is now routine: a hydropower company lists on the stock exchange before its plant is completed, retail investors subscribe in droves and promoters sell their shares immediately after the mandatory lock-in period ends. Projects are left without strategic sponsors. Companies trade without leadership. Capital evaporates before capacity is built.
Earlier the Securities Board of Nepal (SEBON) published a study that provides the clearest evidence to date of this phenomenon. Of the 43 listed hydropower firms reviewed, 20 experienced early and concentrated divestments by promoters. These divestments took place as soon as lock-in restrictions expired, in many cases well before the project had begun generating power. Founders monetised their stakes at a stage when construction risk and cost escalation remained unresolved. The burden was transferred to public investors—most of them retail shareholders—who entered on the promise of future returns from national infrastructure.
The business model invites scrutiny. Hydropower development requires large upfront capital and extended construction timelines, as well as payback periods that stretch across regulatory cycles. Investors who subscribe to IPOs before revenue generation are financing incomplete assets with uncertain risk profiles. When promoters exit early, there is little institutional continuity. Operational knowledge is lost. Debt covenants become vulnerable to mismanagement. Cost control weakens. Governance structures become nominal.
The fallout is not only underperformance. It is also misalignment. Capital markets function effectively when incentives between insiders and outsiders are synchronised. Early exits by founders dismantle this alignment at inception. Retail investors are left with ownership stakes in firms that lack strategic sponsors. Boards become reactive. Management lacks direction. The market price reflects sentiment, rather than fundamentals.
Defenders of early exits cite the principles of market freedom. They argue founders have taken early risk and are entitled to liquidity once regulatory conditions are met. They note prospectuses disclose all relevant project risks, and that investors are free to make independent judgments. They claim regulatory interference in exit timing distorts capital flows and discourages entrepreneurship.
The assumptions behind that defence are flawed. Disclosure is not a substitute for alignment. Regulatory compliance is not a proxy for responsibility. In markets where institutional investors are scarce and information asymmetries are high, early exits by insiders cannot be neutralised through prospectus disclaimers. Domestic investor base contains largely individuals without access to the tools or training to evaluate project-stage assets. The absence of credible institutional anchors compounds the problem.
The consequences transcend individual firms. When founders exit before asset commissioning, they signal lack of confidence in their own projects. This saps wider market trust. Repeated share dumping depresses valuations across the sector. Secondary market volatility deters long-term capital. Over time, public listing becomes a tool for financial engineering rather than project development. The reputation of the exchange suffers.
SEBON has acknowledged the issue. It recommends a series of reforms. These include a cap on promoter share conversion to 19% at a time; mandatory retention of at least 30% equity for seven years; and a ban on IPOs before a project reaches commercial operation. It also proposes restrictions on use of IPO proceeds, requiring 50% physical progress before approval, and introducing minimum internal rate of return thresholds for listing.
The proposed measures are incremental not draconian. They seek to create a sequenced path to liquidity, rather than prohibit exits entirely. They are intended to match founder incentives with project performance. Yet implementation has faltered. Lobbying by the Independent Power Producers’ Association of Nepal (IPPAN) has diluted several provisions. The regulator has hesitated to enforce binding rules. The result is regulatory ambiguity. Founders continue to exit early. Retail investors remain exposed.
Hydropower is not a peripheral asset class. It is the core of Nepal’s infrastructure ambition. Export agreements with India and Bangladesh, and regional connectivity initiatives, all rely on the credibility of energy producers at home. Domestic capital is expected to finance a growing share of new capacity. This depends on investor trust. That trust cannot be sustained if public equity functions as a temporary parking spot for insiders.
Reform is not a matter of protecting investors from risk. It is about defining rules that makes sure risk is matched with responsibility. Founders who wish to access public capital at pre-operational stages must remain exposed to project outcomes. Liquidity should follow performance and not precede it. Otherwise the capital market will continue to serve private exit strategies rather than public capital formation.
Other jurisdictions with similar developmental trajectories have faced equivalent dilemmas. In India infrastructure investment trusts (InvITs) were created to allow partial exits while preserving alignment. In Vietnam phased public listings were introduced with regulatory checkpoints at each stage. In Bangladesh big infrastructure projects are subject to scrutiny and approval by specialised government bodies, particularly during the planning and financing stages. None of these systems eliminates risk. They institutionalise it.
Nepal does not require new laws to fix its problem. It needs enforcement of its own recommendations. SEBON has already outlined the structural faults. It now needs to act. Without credible regulation of promoter conduct, the market will continue to reflect enthusiasm rather than discipline. Asset creation will remain vulnerable to opportunism. And the promise of hydropower will continue to depend on the willingness of founders to remain committed to the companies they create.
Otherwise the only reliable current in the hydropower market may be the flow of promoters heading for the exit. ■
