Safety net for IPO investors likely

In a move that will cheer retail investors, the Securities and Exchange Board of India (Sebi) is planning to introduce a ‘safety net’ for them in all initial public offerings (IPOs).

The ‘safety net’ would put the onus on the promoter to compensate small investors if the share price falls below a threshold limit within six months of listing.

According to sources close to the development, this will be one of the main discussion points in the board meeting on August 16. The definition of ‘small investor’ and the threshold limit are still under discussion.

CASTING THE NET WIDE

• Onus would be on promoter to compensate small investors if share price falls below a threshold limit within six months of listing
• Sebi board to discuss the plan at Aug 16 meeting
• Definition of ‘small investor’ and threshold limit to be finalised
• Some market players sceptical, say move could scare away issuers; others say six-month timeline reasonable

Investment bankers said the ‘safety net’ concept was already a part of the Disclosure and Investor Protection guidelines but since it was optional, it had been seldom exercised. In 2006, Usha Agro had offered a safety net of six months to retail investors if the share price fell below the issue price of Rs 15. IDBI Capital Markets was the sole lead manager of the issue.

Market players, however, termed it a retrograde step as it would scare away issuers. V K Sharma, head of business, private broking & wealth management, HDFC Securities, said that would delay project implementation as merchant bankers would not allow the company to use funds till the six-month period expired. As a result, the true value of the stock would not be discovered within that time frame.

However, Arun Kejriwal, director, Kris Securities, said that would put pressure on investment bankers to price the issue properly. “The time limit of six months implies 120 trading days, which is quite a long time for anyone to manipulate prices,” he added.

Almost 80 per cent of the 170-odd issues that have hit the market since 2008 are trading below the issue price, an analysis by the Business Standard Research Bureau shows.