Mandatory safety mechanism for IPOs is a bad idea; Sebi must junk it

Print Posted Date : 03-Oct-2012 , 08:16:36 am | Posted By CASANSAAR

Listen to this Article

0:00

The Securities and Exchange Board of India's (Sebi) proposal for a mandatory safety net mechanism forinitial public offerings (IPOs) is a classic example of the remedy being worse than the disease. Nothing could be more misguided. It is a fact that the IPO market has been in the doldrums for the past many months.

Thanks to a combination of factors - the slowdown in economic growth and high inflation - investor confidence in financial instruments as a class has fallen and has declined even more sharply in equities, owing to the sharp correction in the BSE Sensex. The net result is not only a marked dip in the number of companies filing prospectuses with Sebi, but even those that have got the go-ahead are holding back, waiting for sentiment to improve.

As the capital markets regulator that is charged with both regulatory and developmental functions, Sebi is understandably eager to see a revival of interest in the stock market.

However, to argue, as Sebi's Discussion Paper on the Mandatory Safety Net Mechanism (placed for comments on its website) does, that "if the trend continues, the sentiments of the investors would get affected and they may lose confidence in the capital market" and, hence, "there is a need to provide a Safety Net Arrangement to build confidence in capital market" is utter folly.

The fact that Sebi's analysis showed that close to 62% of the 117 scrips listed during 2008-11 were trading below the issue price after six months of their listing and the fall was more than 20% for many is no justification for mandating a safety net. Any such move would be inadvisable.

If in its zeal to enthuse investors into the IPO market, Sebi tweaks the regulatory framework to compel issuers to provide a safety mechanism, it would be going against the very grain of stock market investment.

The mechanics of how the scheme will operate - the trigger, eligibility, period, extent of protection, etc, all of which have been detailed in the discussion paper - are irrelevant. What is relevant is that the outcome is the very antithesis of capital market investment, namely risk-taking. The best way for Sebi to revive investor sentiment is to ensure market integrity. The rest will follow. (Economic Times)