A booster dose for retail participation
Between 2008 and 2011, an analysis of the price performance of the 117 scrips that listed on the stock exchanges shows that 72 (or over 60 per cent of the issues) were found to be trading below the issue price after six-months of their listing. Of these 72 scrips that witnessed a fall in price, in 55 scrips, the fall was more than 20 per cent of the issue price.
Citing the trend as being a “negative influence” on investor sentiment, market regulator Sebi has proposed a ‘safety net arrangement’ for retail individual investors, something that has been welcomed by a section of investors even as the proposal, which was deliberated upon at the Sebi board meeting last Friday, has met with its share of brickbats.
SAFETY NET TRIGGER
The proposal is essentially an extension of Regulation 44 of Sebi Regulations, 2009, which addresses the concept of a safety net for investors in an IPO. Under the current provisions of this regulation, “an issuer may provide for a safety net arrangement for the specified securities offered in any public issue, in consultation with its book running lead manager (BRLM) after ascertaining the financial capacity of the person offering the safety net arrangement.” A maximum of 1,000 securities per original retail individual investor, in an initial public offering, is to be covered under the arrangement, with the buyback slated to be done at the issue price and needing to be exercised within a period of six months from the date of dispatch of securities.
The key change now proposed is to make the safety net “mandatory”. Sebi, in its discussion paper on the subject, had proposed that issuers will have to compulsorily offer a safety net to all retail individual investors within a period of three months from the date of listing of equity shares, if the share price falls more than 20 per cent of the issue price. Further, the safety net is to be provided only after observing the trend in the broader index, for three months from the date of listing.
The safety net provision shall trigger only in cases where the price of the shares depreciate by more than 20 per cent from the issue price. The price for this provision shall be calculated as the volume-weighted average market price of such shares for a period of 3 months from the date of listing.
Further, the 20 per cent depreciation in share price shall be considered over and above the general fall, if any, in the market index, which could be the BSE-500 or S&P CNX 500.
HOW WILL IT WORK
Case-1: Assume listing price for share is Rs 100 and market index on listing date is 1,000. After 3 months, volume-weighted average market price of the shares is Rs. 79 (drop of 21 per cent) and the market index is 1,000 (drop of 0 per cent). The safety net provision will trigger since relative fall of 21 per cent (21 per cent-0 per cent) is more than 20 per cent trigger level.
Case-2: Assume listing price for share is Rs 100 and market index on listing date is 1000. After 3 months, volume-weighted average market price of the shares is Rs 79 (drop of 21 per cent) and the market index is 900 (drop of 10 per cent). The Safety Net provision will not trigger since relative fall of 11 per cent (21 per cent-10 per cent) is less than 20 per cent trigger level.
Case-3: Assume listing price for share is Rs. 100 and market index on listing date is 1000. After 3 months, volume-weighted average market price of the shares is Rs. 69 (drop of 31 per cent) and the market index is 900 (drop of 10 per cent). The safety net provision will trigger since relative fall of 21 per cent (31 per cent-10 per cent) is more than 20 per cent trigger level.
Case-4: Assume listing price for share is Rs 100 and market index on listing date is 1,000. After 3 months, volume-weighted average market price of the shares is Rs 89 (drop of 11 per cent) and the market index is 1100 (increase of 10 per cent). The safety net provision will not trigger even if relative fall of 21 per cent (11 per cent-(-10 per cent) is more than 20 per cent trigger level since the absolute drop in share price is 11 per cent which is less than 20 per cent trigger level.
The facility will be available for all the allotted securities to original resident retail individual allottees who had made an application for up to Rs 50,000. The total obligation on safety net provider is to be capped at 5 per cent of the issue size. In case the total number of shares offered under the safety net scheme works out to be more than 5 per cent of issue size, the purchase of securities from original resident retail individual allottees shall be done on proportionate basis such that total obligation does not exceed 5 per cent of the issue size.
While there are plenty of those who support the proposals, citing the fact that the depreciation in post-listing price in a large number of cases could lead to a crisis of confidence in the market and thereby jeopardise capital raising, a contrarian view has been voiced by a section of experts. According to Sandeep Parekh, founder, Finsec Law Advisors and visiting faculty, IIM-A, the move “does not solve the problem of the depressed market, does not cure the malady of promoter rigging, and positively forces a legal manipulation of the market”.
Risk, according to analysts, is a factor which is intrinsic to the equity market and the regulator needs to draw a distinction between the risk of market movement versus the risk of fraud, with the latter offering a more compelling case for being addressed.
While Sebi’s move to put in place a safety net comes at a time when the market regulator has unearthed several IPOs, where the promoters had set up financiers to rig the IPO with subscription money and post listing. Most of these IPOs fizzled out as the financiers take their money out of the capital raised by the company from the public. But the pitfall in having such a mandatory safety net provision in place, they say, lies in the fact that the recommended measures could end up penalising entrepreneurs who have spent years building the company or private equity players invested in the medium to long-term, who would have to pay money to speculative investors wanting to simply make listing gains.
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