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 UK Sinha today hinted that the regulator might take the middle path on implementation of this framework following mixed feedback from industry players on the discussion paper --'Mandatory Safety Net Mechanism' floated in September.
Under the 'safety net' mechanism, initial public offering (IPO) companies 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 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, didn't elaborate on what might come in the 'mild version' and also when the Sebi board is likely to take up this issue.
Some market players believe that 'safety net' for equities, which is a risk asset, would be an antithesis. While some are of the view that it is necessary to reinstate comfort in the minds of investors after the poor performance of majority of IPOs in the last couple of years.
As per 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 is 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 a period of 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, the company will have to refund money to investors.
“The whole idea behind safety net is that we want to put some pressure in the minds of promoters and advisors on pricing,” said Sinha today.
Sinha today also raised concerns over growing instances of rivalries in corporate India. He said companies are 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 also said there are 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 to prevent 'flash crashes' in the next few days.
Rajeev Agarwal, whole-time member, Sebi at the same event 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 the circuit might be opened for further trading,” he said.
