'Mild version' of IPO safety net possible

Market regulator Securities and Exchange Board of India (Sebi) might introduce a diluted version of the ‘safety net’ framework it had laid out in a discussion paper earlier this year.

Sebi Chairman U K Sinha on Wednesday hinted it might take a middle path on implementation of this framework, following mixed feedback from industry players on the discussion paper titled ‘Mandatory Safety Net Mechanism’, floated in September.

Under the mechanism, companies issuing initial public offerings (IPOs) have to compensate investors if their share prices see a sharp drop in the first few months after listing. “It might be a mild solution. Somebody who wants to protect the small investor all the time, will be disappointed. Somebody who feels that there should be no safety net, will also be disappointed,” said the Sebi chief, on the sidelines of the CII Capital Market Summit here.

Sinha, however, did not elaborate on what might come in the ‘mild version’ and also when the Sebi board was likely to take up this issue.

While some market players wondered how there could be a safety net for equities, a risk asset, others feel it is necessary to instill confidence in the minds of investors in the light of the poor performance of a majority of IPOs in the past couple of years.

According to a Business Standard analysis, 25 per cent of IPOs between 2008 and October 2012 would have had to refund money to investors, if the framework laid out in the discussion paper was applied to these companies.

According to the Sebi paper on safety net, if a volume-weighted average market price of a newly-listed stock for three months from the date of listing depreciates by more than 20 per cent from its issue price, or if the fall in the stock price is 20 per cent more than the fall in the broader market, then the company will have to refund money to investors.

“The whole idea behind the safety net is that we want to put some pressure in the minds of promoters and advisors on pricing,” said Sinha.

The Sebi chief also raised concern over growing instances of rivalry in corporate India. He said companies were setting up separate offices to look at their competitors. “What depth are we going into? You can harm your competitor and your competitor can harm you and then in the end, India will be harmed,” he said. “If somebody is doing something wrong, there are systems to take care of it. There are advisory firms as well who are doing a very good job.”

Sinha said there are a large number of complaints being filed against IPO-bound companies, which are not necessarily from investors or investor associations, but from competitors.

Meanwhile, Sebi will also come out with a new set of guidelines in the next few days to prevent ‘flash crashes’.

Rajeev Agarwal, whole-time member, Sebi, indicated that some quantitative limits on individual orders and dummy circuit filters for stocks could be introduced. “Under dummy filters, participants will not be able to put in an order beyond a certain price. But when the price reaches that level, the circuit might be opened for further trading,” he said.