Sebi move to help e-IPOs improve reach: Haldea

In an effort to revamp the primary markets, the Securities and Exchange Board of India (Sebi) board has approved a number of comprehensive reforms. Changes to boost the growth of the mutual fund industry have also been announced by the market regulator along with the issuance of norms for e-IPOs.

Besides, Sebi will also ensure that a minimum number of shares are allotted to retail investors in IPOs. The e-IPO procedure will also facilitate electronic bidding in public offers.
Prithvi Haldea, CMD of Prime Database believes the changes introduced by Sebi is not only important but is also far reaching. The e-IPOs will significantly improve the reach of IPOs and the restrictions on revision of bids will help prevent malpractices. Overall, this can pave a fast track route for midcaps to raise funds with ease. Here is the edited transcript of the interview on CNBC-TV18. Q: Do you think that the idea of SEBI to give every retail applicant some share offering in an IPO is a good idea, would it not become very difficult in case of very high issuances like we saw during the go-go years?
A: If you understand this slightly carefully, what it says and means is that there have been lots of issues in the past which has been oversubscribed in the retail portion and what therefore happens is that our retail investors ultimately land up with purely 4-6 shares. Having made all the efforts to apply for an IPO, if you are allotted only 4 shares, it could see you off and therefore, it doesn’t make any sense for you to reinvest in the IPO market.
What SEBI is trying to do is they are saying that there is at least some minimum allotment that you get if you apply in an IPO. It does not mean that you are going to get more than what you have applied for. You are going to obviously get it even if the issue is oversubscribed.
You are going to get less than what you have applied, but there is still a minimum assured amount. Therefore, it makes investors happy because he now gets Rs 15,000 worth of shares and not just Rs 500 or Rs 1000 worth of shares which is neither here nor there. I think that is a good move.
_PAGEBREAK_ Q: What in the IPO announcements make you think that this is a move for the better at all? Is the move towards increasing the minimum application a good one? What did you like about the announcements?
A: I think these are very important and very far reaching announcements. These are not to suggest that the IPO markets will be on the revival path tomorrow. That is not SEBI’s job in any case. That is to do more with the economy and how the corporate sector and how the secondary markets perform.
But, looking at the IPO market, I think I can divide a slew of these measures into two categories. One, which are entirely pro-investors and the others which are pro-issuers. If you look at the pro-investors, the profitability track record that has been brought in is Rs 15 crore. In case you are a loss making company, you can still come to the market but then 75% has to be brought by QIBs. So you are not exposing retail to non-profitable companies and making them work more like a venture capitalist.
Then you have e-IPO which will basically increase the reach and distribution of IPOs across the country or every single terminal of BSE and NSE broker who would now be able to accept applications. You also have a new important announcement which has not been covered so well till now. It is about the disclosures in the continuing regime.
Right now we are very focused on IPO disclosures. The offer documents run into 1000 plus pages. But, when it comes to continuing disclosures you are talking of only 3-4 kinds of quarterly results, shareholding pattern etc. By adopting the 20 F form of the US you are actually focusing now more on continuous disclosure where the number of trades are much larger on a daily basis than the IPO size.
So I think it is a very good move to keep investors informed on a variety of things and not just on quarterly results, shareholding pattern or some major corporate announcement.
There is another very important and very long awaited reform which has taken place. If you remember in early last decade, a lot of issues used to get oversubscribed in the very first minute. That was because there is no margin money requirement and you could actually persuade the investors to put in money and give a wrong message to the market place and retail investors about the issue.
SEBI subsequently imposed a 10% margin, then a 25% margin and then a 100% margin. It also said that you cannot withdraw an issue but you could revise. Revision actually led to misuse where a lot of bids would come on the first day and on the fourth day the bid would get revised to say one share which is actually withdrawal. Therefore, wrong signal was being given to the market.
SEBI has now come out very clearly saying that you can revise the bid but, only on an upward side. You cannot put in a bid and then reduce the number of shares and then leave the retail investors with a wrong picture.
On the issuers side, I think the dilution norms have become more favorable. There are rights and a bonus offering which is now allowed to be used. There is also a 5% discount which has been allowed on QIP plays. QIPs typically have been buoyant market estimates.
I think SEBI is taking cognizance that even in a declining or volatile market the price can be lower than the average of the last 15 days by 5% and that is a very good move and a fast track route for companies with a market cap of above Rs 3000 crore as against Rs 5000 crore. It will enable some of these companies to raise money faster.
Finally, since we are seeing a new generation of companies which are promoted by VCs etc, SEBI has taken cognizance that they may not be clearly identifiable promoters. Therefore, they have allowed this 20% promoter holding which also includes VC firms and other alternative funds.
Coming back to the issuer, the 5 day price availability means you have to disclose the price band to the market place 5 days before the IPO, not two days. It is basically to give investors and analysts more time to analyze the price vis-à-vis the earnings, peer comparison etc rather than leaving it for the last moment.
As we have seen most of the advertisements have bullet dots wherever any comparison is done because the prices are announced almost on the last day. So the five day window will give much larger room for better analysis and make investors hopefully more informed when they are investing.
_PAGEBREAK_ Q: Most of the things that you mentioned have been approved except for the issue of safety net for retail participants in an IPO, the SEBI is still mulling that bit, I just wanted to ask you how can retail shareholder be guaranteed for a fixed period in the equity markets, isn't that against any kind of equity ethics of investing?
A: By the same logic you should also question why should government give a fiscal incentive under the Rajiv Gandhi Equity Scheme. There are measures which have to be taken to reach a particular goal.
If there is a general feeling and it has been spread substantially by the media that IPOs have been overpriced and if you are looking at the small investor, the smallest of the small investors, original allottees, six months down the line the price flies away by more than 20%. You buy 50% or 75% of its holding at the offer price. I think it gives a good signal to the market. It is a good confidence building measure.
At the same time, it probably also brings some more sanity in the issue price because there is now liability on the part of the promoter to buyback. I am not saying that there are no downsides to it. Obviously, equity should not be linked to any kind of guarantees but as I just mentioned, there are special situations where you have to let go.
The safety net has already been a part of SEBI guidelines for the last several years. It was only voluntary and we saw that nobody was using it. There was no objection to safety net as a principle when it got included for the first time in Issue of Capital and Disclosure requirements (ICDR) guidelines. It is now that SEBI has started thinking of making it mandatory that we are hearing some voices.
I am not saying that those are not valid voices. There is a point in saying that promoter should not be asked because the market conditions could deteriorate. So the fall could be linked to the market index and therefore, you say that in case the stock falls by more than 10% than the index falls. That technically means there could be something wrong with the stock and if you are looking at only Rs 50,000 worth of investors, original allottees because a lot of these allottees have actually sold out on the listing date or beyond the listing date, you are looking at a very small population.
I think it is more a good signal and a confidence building measure and at some point of time, with due revision, I would hope that safety net comes in.