Strong opposition to proposed safety net mechanism: Sinha

The proposed 'safety net' mechanism for investors has generated strong opposition from various stakeholders, market regulator Sebi today said.

"In mandatory safety net mechanism on which we have taken out a paper, we have received very strong opposition from various segments of society," Sebi Chairman U K Sinha said in a interview to private news channel CNBC TV18.

"People are saying equity are risk instruments. So, why provide safety but our current regulations do provide for voluntary safety," he added.

Under the proposed safety net scheme, if the market value of the shares falls below the issue price at any time during scheme period, promoters would buyback shares at the sale price from original allottees. However, the buyback would be subject to a maximum of 1,000 equity shares per allottee.

Sebi, in September 2012, had floated a discussion paper on 'saftey net' and collected feedback on it from the market.

In the last seven years, only three companies had offered to provide saftey net to retail investors.

Just Dial, which hit the primary markets today, would provide 'safety net' for retail investors.

Apparel retailer Sai Silks' (Kalamandir), which withdrew its IPO, had proposed to adopt the mechanism for retail investors. This was also the first issue in seven years to provide safety net scheme.

Prior to Sai Silks, Usher Agro had offered safety net to investors when it came out with intial public offer in 2006.

Sinha said that there is a provision for voluntary safety net in the current regulations. He added that some companies tapping the IPO route at high valuations are coming forward with a 'safety net'.

"We have come out now with a mechanism that if we feel that IPO application is not conformity with our requirements or certain important things are not disclosed, then we can reject offer documents," Sinha said.

"Once you (IPO) are rejected, the merchant banker will get a bad name and you can not come back as a corporate for 12 months, you lose your fees so that fear is perhaps bringing some of the corporates, who for example, expecting very high valuations have come forward," he added.