Sebi seems likely to proceed with IPO safety net proposal

The market regulator is also strengthening its surveillance mechanism to tackle market manipulation

The Securities and Exchange Board of India (Sebi) is likely to implement the so-called ‘safety net’ mechanism in the form laid out in its earlier discussion paper, despite stiff opposition. The securities market regulator is also strengthening its surveillance mechanism to tackle market manipulation, said chairman U K Sinha.

“There is a concern that the Indian market is a casino and you can do anything and get away with it.. .I would like to assure you that the worry (on whether) the market is well regulated or not is definitely not on the side which will allow things to happen without getting noticed by the regulator. I’d rather say it is at the other extreme,” he said on the sidelines of an Assocham conference.

Sebi’s plan to introduce the safety net as proposed, involves issuers compensating investors if their share prices see a sharp drop in the first few months following an initial public offering (IPO). So far, Sebi has only floated a discussion paper and collected feedback on it from the market. The final decision is expected during Sebi’s board meeting later this month.

The move to have a safety net is triggered by Sebi’s dissatisfaction over issue pricing, as a little more than two-thirds of IPOs are trading below their issue prices.

“On the one hand, there is an argument that equity is a risk capital and how can you ask to return money? On the other side, since two-thirds trade below the issue price, how do you expect retail investors to come into the market?” said Sinha. “We must introduce the mechanism, maybe in a milder form, to give a signal that the pricing has to be right.”

Sinha said the safety net framework put out in the discussion paper was a very mild one, as the maximum refund on an IPO was only five per cent of the total issue proceeds. This mechanism would get triggered only when the share price of the issuer company falls 20 per cent in the initial three months.

“The pricing of an IPO in this country has been an issue,” said Sinha, noting the facts mentioned earlier. “Again and again, we are finding that there is lack of transparency in pricing.”