The share price of Reliance Spinning Mills Limited has plunged by over Rs 2,200 per share in past four months due to panic selling before the lock-in period for institutional investors ends on Bhadra 1.
Around the start of the new year 2083, the shares of Reliance Spinning Mills Limited (RSML) were trading at nearly Rs 5,000 per share. But on Tuesday, the price crashed to Rs 2,705. This means the price has dropped by about 45 percent in just four months. In terms of money, this is a massive drop of more than Rs 2,200 per share. Investors who bought the shares at around Rs 5,000 during the start of the year and held them are now in a loss of over Rs 2,200 per share.
The trading in the last one week is even more shocking. Just a week ago, the shares were trading at around Rs 3,500 to Rs 3,600. Within one single week, it fell down to Rs 2,705. This is a drop of more than Rs 900 per share, which is about 25 percent loss in just a few days.
Market experts say this big drop is not because of company’s business or financial condition. Instead, it is linked to the lock-in period of Qualified Institutional Investors (QIIs) which is about to end soon.
The Issue of Free Float and Lock-in Period
Reliance Spinning came to the public market through the book building method. The total capital of the company is 1 crore 90 lakh shares. However, only 19 lakh 26 thousand shares, which is just 10.14 percent, were issued to the public. Out of this, 7 lakh 70 thousand 640 shares were given to QIIs, and these shares had a lock-in period of six months from the date of listing.
This meant that after listing, the actual free-float shares available for immediate trading in the market was only 11 lakh 55 thousand 360 shares. This is just about 6 percent of the company’s total capital. Because the supply was so small, even a little buying pressure made the share price rise very fast. Analysts say this is why the price reached Rs 5,000 soon after listing.
But now, the situation has completely changed. On coming Bhadra 1, the six-month lock-in period for the 7 lakh 70 thousand 640 shares owned by QIIs will end. Since QIIs bought these shares at Rs 912 per share, investors fear that they might sell their shares to secure profit. To save themselves, ordinary investors have started selling their shares early. Analysts say that before actual selling even started, the market has already adjusted the price for the upcoming supply, causing a 25 percent fall in the last week.
Structural Problems in the Nepalese Capital Market
Analysts say that this incident shows a big structural issue in the Nepalese capital market. Only 10.14 percent of the company’s shares were issued to the public. Out of that, 40 percent was locked with QIIs, making the initial market supply very low. This low supply pushed the price up artificially, and now the fear of new supply has crashed the price.
Many companies in hydropower, manufacturing, and hotel sectors listed on the Nepal Stock Exchange also issue only 10 to 20 percent of their total shares to public. The rest of the shares stay with promoters and are locked for three years. In past, similar trend was seen where prices rose high during lock-in period due to low supply, and then crashed when promoter lock-in period came near to end.
This situation raises questions about the real price discovery in Nepalese share market. Analysts say that instead of company’s business, profit, and future prospects, the price is being driven by artificial shortage of shares and sudden supply shocks. If limited free-float and lock-in rules decide the price, the market cannot show the real value of a company.
Because of this, market experts suggest that regulators should rethink about minimum free-float ratios, lock-in structures, and rules to release locked shares in a phased manner instead of all at once. They say that reviewing current free-float and lock-in system is necessary to make the market more mature and stable.
Information Regarding Reliance IPO
Reliance Spinning Mills brought its IPO through the book-building method. In this method, QIIs first bid the price they want to pay. Based on their bids, the cut-off price was set at Rs 912 per share, which is what the QIIs paid. After that, ordinary public got a 10 percent discount and were offered shares at Rs 820.80 per share.
The company issued a total of 19 lakh 26 thousand 600 shares in the IPO. Out of this, 7 lakh 70 thousand 640 shares were for QIIs. The remaining shares were given to the general public, Nepalese in foreign employment, company employees, and mutual funds.
To break down the IPO details, the total IPO was 19 lakh 26 thousand 600 shares. Out of this, QIIs got 7 lakh 70 thousand 640 shares. The retail public got 10 lakh 40 thousand 364 shares. Lastly, mutual funds and employees both got 57 thousand 798 shares each.
AI Disclaimer: This article was originally published on https://bajarkochirfar.com. It has been translated with the help of AI. For the best understanding and accurate facts, we recommend reading the original Nepali version.
