Safety net a good idea for small allottees: Prithvi Haldea

Chairman UK Sinha today said that this concept required more consultation, and has therefore invited the public to voice their views on the idea of a safety net.

Under a safety net mechanism, certain portion of the investment made by retail shareholders could be guaranteed for a fixed period against market volatility. This concept was introduced to encourage more retail participation on initial public offers, especially at a time when investment sentiment is low in the country.

According to Prithivi Haldea, chairman and managing director of Prime Database, the concept of a safety net is good, but only if it is for small allottees. “It is a good move if it is very well structured and it is limited only to very small investors and original allottees, and the loss is significant, maybe 15-20% to the offer price as compared to the index” he said in an interview to CNBC-TV18.

It has been noted that recent IPOs have seen a sharp drop in price on listing day, a factor which has caused retail participants to hesitate before applying for an IPO. Haldea says a safety net is a good choice, especially when there is a fall beyond the market.

He goes on to say that SEBI should have also considered hiking the retail allocation for IPOs, especially for public sector unit issues where retail interest is high.

Also Read: Sebi measures will ensure investor-friendliness, say experts

Below is an edited transcript of his interview with Shereen Bhan.

Q: After the process of public consultation is over, do you believe that there should actually be a security or a safety net?

A: Yes, if it is very well structured and it is limited only to very small investors and original allottees, and the loss is significant, maybe 15-20% to the offer price as compared to the index. It could be even indexed to the market. Therefore, incase there is a fall which is beyond the market then I think it is a good move to cover the small investors.

Q: Do you believe that there is merit in the argument of having two classes of investors or three, which is what SEBI has now decided on?

A: There are two sides to this. If you have a 15% category, it basically allows high net worth individuals (HNIs) and Indian corporates to participate in an IPO. They don’t have to be clubbed along with qualified institutional buyers (QIBs) and get shorted out because of propionate allotment.

But there is the question of why create multiple categories at all. The more categories you have the more complications you have, the more manipulations you can have. There is also a lot of debate which has been going on as to why there should be a 35% reservation for retail. It should be one single issue and let every allotment be done on propionate basis.

The logic is that in case we want retail investing population to grow, and if you want some allotments to them, then you have to create a reservation for them so that they compete only within themselves and they don’t compete against the big guys. It’s a view that needs to be taken. So I think both have merits and both have de-merits.

I would be happier in case retail allocation is increased, especially for public sector unit issues because retail would show a lot of interest in PSUs and that’s a good way of distributing national wealth to public at large.

Q: Speaking of aligning ourselves to global practices as far as the disclosures standards are concerned, aligning ourselves to what the SEC does, again a step in the right direction?

A: I think that is a fantastic move. What is happening is that we have been concentrating too much at the IPO stage where disclosures become actually much greater than what is even required. But when the company gets listed, and when 100 times of the IPO size gets traded on a daily basis, the disclosures remain only in terms of four or five forms, which is share holding pattern, results on a quarterly basis and it leaves the material development through the discretion of the company.

So I think there is a greater need now to enforce a much better regime for continuing disclosures. Once the company gets listed, then there has to be a very structured format for it to disclose all material things as are required in the prospectus so that investors are more aware about the companies which are listed and I think that’s a very good move.