Sebi to consider ‘safety net’ for IPO investors

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Market regulator Sebi will consider in September providing capital protection to part of investments made by very small investors in IPOs (initial public offers), although the move is being opposed by investment bankers and certain other sections of the industry.

In its last board meeting on Aug 16, Sebi had to defer a decision on providing a 'safety net' guarantee to investors buying shares through IPOs, as issues were raised about any such provisions interfering in the normal market functions where share prices move as per the fundamentals of the company and overall marketplace.

After the board meeting, Sebi chairman U.K. Sinha had said that further larger consultation is required on this issue and a final view will be taken accordingly.

However, the 'safety net' proposal would be back on the agenda when Sebi board's meets next month, although some changes could be made to limit this benefit to 'very small investors', a senior official said.

Sebi is of the view that a 'safety net' provision in the IPOs could help in the government's efforts to channelise the household savings into the equity market, rather than turning into 'idle money' by going to assets like gold, he added.

It is also being considered that the safety net could be provided for only the minimum lot of shares, which Sebi has proposed for every retail investors in the IPOs, the official added.

The 'safety net' is one of the key proposals being discussed by Sebi for its primary market reforms. It has been felt that such a provision would help in fair pricing of IPOs, besides providing investors some sort of a capital protection guarantee.

Finance Minister P. Chidambaram had said that he has requested Sebi chairman to consider further market reform measures for the benefit of the investors in its next board meeting.

Welcoming the wide-ranging reforms undertake by Sebi in its last board meeting, the Finance Minister had said that these measures "will stimulate financial savings among households as well as give a fillip to the mutual fund industry. More and more households should be encouraged to save in financial instruments rather than in gold."

Under the proposed 'safety net' mechanism, a certain portion of the investment made by retail shareholders in the IPOs could be guaranteed for a fixed period, which could be for six months, even if the shares' value plunge below the IPO allotment price during this time.

As per the proposal, the small retail investors would be compensated by the promoters and other entities selling shares through IPOs in the event of the company's shares plunging below a certain threshold limit within six months of listing or the time frame set by Sebi.

However, investment bankers and some other sections of the industry have expressed their opposition to the Sebi about this proposal, saying a capital protection guarantee could interfere in the normal price discovery of shares getting listed afer IPOs.

Many companies and investment bankers have come under criticism of over-pricing IPOs after the shares fell below the public offer price levels in several cases.

Sources said the companies could be allowed to pass on the costs of 'safety net' provision to the investment bankers, who are primarily responsible for fixing the price of shares to be sold through IPOs.

As per the current regulations, the companies are allowed to voluntarily provide such 'safety nets' in their IPOs, but it is not mandatory for them to make such provisions and only a few companies have provided such facility for investors in the past.