In order to protect small investors from adverse price movement, market regulator Securities and Exchange Board of India (Sebi) is contemplating to provide a safety net mechanism in initial public offers (IPOs).
On Friday, Sebi put out a discussion paper on this new mechanism on its website to invite public comments on or before October 31.
The regulator has invited comments on issues like whether the safety net provision should be mandatory for all IPOs, the trigger for such mechanism and elegiblity of investors.
Sebi board, which had discussed this issue in its board meeting on August 8, decided to float the disccusion paper before the new mechanism is implemented.'
"Considering the Indian market dynamics and the recent post-listing price performance of IPOs, the Board opined that besides disclosures, other measures are needed to bring self-discipline in the IPO pricing. One such measure which could help protect the interests of small investors is a safety net mechanism," Sebi said. "While agreeing with the approach in this regard, it was of the view that more public consultation on the details of the proposal was needed, before it could be implemented."
Sebi's Primary Market Advisory Committee (PMAC), which had discussed this issue on July 31, was of the view that considering the recent post-listing price performance of IPOs, it is necessary to make the safety net mechanism mandatory for IPOs so as to reinforce investor confidence in capital markets and discipline issuers and market intermediaries. "The committee was, broadly, in concurrence with Sebi on the need for such a mechanism.
However, the committee was of the view that the proposed mandatory safety net mechanism would impact various segments of market participants such as investors, issuers, promoters, merchant bankers etc., and that public comments be sought.
In its analysis of price performance of the scrips listed during 2008 to 2011, Sebi observed that out of 117 scrips, 72 (around 62% issues) were trading below the Issue price after 6-months of their listing. Out of those 72 scrips which witnessed fall in price, in 55 scrips the fall was more than 20% of the issue price.
"In this scenario if the trend continues, the sentiments of the investors would get affected and they may lose confidence in the capital market. Thus, there is a need to provide safety net arrangement for retail individual investors to build their confidence in capital market," said Sebi.
In the discussion paper, Sebi has sought consultation on whether the safety Net provision shall trigger only in cases where the price of the shares depreciate by more than 20% from the issue price. The price for this provision shall be calculated as the volume-weighted average market price of such shares for a period of 3 months from the date of listing, Sebi said.
"Further, the 20% depreciation in share price shall be considered over and above the general fall, if any, in market index. The market index for this purpose may be BSE-500 or S&P CNX 500. The market index to be considered for this purpose shall be disclosed, in advance, in the offer document," Sebi said in the discussion paper.
In terms of eligibility, the regulator said that the facility would be available for all the allotted securities to original resident retail individual allottees who had made an application for up to Rs 50,000. There also other conditions like total obligation on safety net provider will be capped at 5% of the issue size and the maximum obligation of the promoter would be 5% of Rs 1000 crore issue. This means, the promoter will be obliged to buy the shares worth Rs 50 crore at the issue price.
