To begin with, they say that there is an inherent issue with the way the regulator is measuring the fall in stock price in an event where the broader market index has risen post-listing.
According to the discussion paper, in a scenario where the index is up while the stock is down, the relative fall will not be considered and the safety net will be triggered only if the absolute fall is more than 20%. In other words, if the stock is down 15%, but the index is up 10%, then only the 15% fall in the stock is considered, though the relative under-performance is 25%.
Merchant bankers, on condition of anonymity, also say that the facility of a safety net mechanism in an IPO defeats the premise that investment in an equity instrument is risky.
What if the stock is 80-90% up from its listing price Should the promoters be allowed to have profit-sharing. We must understand that equities are a risk instrument, said a banker, wishing not to be named. He further stated that investors would remain in a fix even if the stock and the index were both significantly underperformed.
According to the Sebi framework released last week, if the stock and the index are both down, say 25% and 10% respectively, then the fall in the stock is considered relative to the index. In the above case, the relative drop is 15% (25%-10%) and the safety net would not be triggered.
Another aspect within the Sebi framework that could cause disarray among retail investors is the cap on application amount. Experts said that limiting the cap to R50,000 would act as a counter-productive measure to pump up retail participation.
The motivation to bring in retail participation would remain small by keeping the cap at just 25%. The objective is to increase retail participation. However, to implement these measures, there will be a lot of operational complications, said another merchant banker with a domestic entity.
According to the framework, the safety net would be available to retail investors, who would have made an application of up to R50,000 even though retail investors are allowed to invest up to R2 lakh in a public issue.
However, Prithvi Haldea, CMD, Prime Database stated that the move by Sebi would bring some sanity to the pricing of issues. The safety net will end the debate on mispricing of IPOs, which would provide higher comfort level to investors and simultaneously remain fair to promoters as their performance would be measured to an index, Haldea said in a telephonic conversation.