Forewarned is forearmed

Updated: Jan 27 2005, 05:30am hrs
The Securities and Exchange Board of India (Sebi) has done well to amend the disclosure rules to make prospectuses more investor-friendly. This was preceded by an elaborate exercise to cut repetition and change the presentation format to highlight and prioritise important information, especially on risk factors. The revised format is also expected to cut advertisement costs of issuers. These changes are welcome, but are procedural. And still have to be extended to electronic filing, for investors to be able to click on specific sections, such as risk factors or promoters background, instead of tediously scrolling down a lengthy document.

More important, Sebi has to find an effective solution to the more serious problem of weeding out dubious Initial Public Offerings (IPOs) that hope to pick peoples pockets. Over the past few months, Sebis policy of not clearing doubtful IPO applications for weeks on end has met with angry complaints. Sebis effort to protect investors is indeed appreciable, but there are allegations that a few good issues have also been stalled with the bad ones. Worryingly, Sebi does not have a clear policy enabling it to reject shady IPO proposals. Having opted for disclosure-based regulation, instead of a merit-based system, there is little Sebi can do to stop crooked issuers, if companies are not willing to publish highly damaging disclosures in their IPO document. It is to Sebis credit that a couple of companies have recently been persuaded to withdraw their IPOs.

Since Sebi is in the process of implementing recommendations made by various committees two years before, it should provide some clarity on the fate of the Central Listing Authority (CLA) it had touted as the answer to creating a safer primary market. The CLA would, indeed, have been able to put in place objective criteria for rejection of doubtful IPOs. But it appears to have become a victim of Sebis internal politics and seems unlikely to take off. That is probably why Sebi is now pushing the concept of IPO ratings or evaluation by credit rating agencies. But a mandatory rating requirement will not have the desired credibility if paid for by the issuer. Whether Sebi finds a solution to this problem or revives the CLA, it is clear some quick action is required to ensure unsavoury promoters do not get their hands on investors money again.