The back-and-forth over a safety net for investors is coming to an end. Market regulator Sebi is inclined to introduce a series of measures to beef-up retail investor safety in the New year, reports, CNBC-TV18’s Sajeet Manghat and Sandeep Srikanth.
Sebi chairman, UK Sinha's pet project -- investor protection -- is all set to get a leg-up. Nearly two months after releasing a draft paper on a safety net mechanism, indications are the market regulator is leaning towards increasing safety for retail investors. Once who invest in IPOs and especially against mispricing of issues.
"The safety net paper is not meant to actually compensate the investors. The whole rationale behind it is to ensure that there is some amount of sanity in pricing. My feeling is that if there is a good pricing and the disclosure are correct and well laid out, issues will be successful," he said.
Sebi's draft proposal seeks to shield any IPO investor who invests upto Rs 50,000 and caps the safety net at 5 percent of the issue proceeds. Exchanges have voted supporting the proposal, especially given the huge variance in information available about various issues, which affects pricing.
Ashish Kumar Chauhan, MD & CEO, BSE said, "Irrespective of the size of the prospectus there is huge asymmetry of information. That is between the company and the investment banker. What is transpiring in from a prospectus is even more asymmetry vis a vis what a person is going to read. Assuming a retail investor has enough time to read up 1000 pages, there is still a huge asymmetry of information. Some where along the line the pricing is not only about the fundamental of the company but also about variety of things."
As things stand, the safety net mechanism will be triggered. That will be only if the underlying stock price falls over 20 percent above the fall in the benchmark index. However, there are many who question Sebi's methods.
Somashekar Sundareshan of J Sagar Associates said, "If you see that the issues are overpriced you deal with it. There is a question of moralsuation. However, if the price falls below X you will have to pick it up, a mandatory safety net.Whether in a diluted form or a strong form it’s a wrong metric that gets applied. The wrong metric will take you to the wrong results."
It claims that of the 118 IPOs listed in the last three years, 72 issues are trading below both their issue. The stock price on 25 companies fell by 25-50 percent. The price of 21 stocks fell 50-75 percent and 1 stock has fallen over 77 percent, compared to the benchmark index. Issuers and Investment Bankers are worried that these statistics could sway the SEBI board. It will take up the matter when it meets in 2013.