Gagging IPO hype

Updated: Jul 27 2006, 05:30am hrs
The ability to impose a strict gag order on companies planning to raise public money is the minimum empowering tool needed by the Securities and Exchange Board of India (Sebi) in the interest of investor protection. Like most other regulations, its efficacy will depend on the alertness of the regulator and its willingness to use its powers effectively. Indian companies that have issued American Depository Receipts (ADRs) are fully aware of the stringency of quiet period regulations and their lead managers ensure these are properly adhered to. In India, the need for such rules became glaringly obvious when a spate of good news reports hit the media in the run-up to a recent public offering by Reliance Industries, merely to drum up what amounted to a massive over-subscription of Rs 147,000 crore. There is another unreported instance where Sebi has questioned a paid puff-piece about a company just ahead of its public issue, which made claims and statements that were not in its prospectus.

The trend of media companies selling editorial space or news for a price is part of this problem, since these reports mislead investors. Besides this, there is invariably a spate of speculative reports about future plans, attributed to anonymous industry sources, that get passed off as false media reports, but usually emanate from IPO issuers. Today, Sebi is forced to clutch at peripheral regulations even to question companies about such manipulative actions. Hopefully, the quiet period rules will allow it to probe deeper and question the media that colludes.

As with all other rules and statutes in India, empowerment does not necessarily translate to action and better investor protection. Sebi itself, under another dispensation, has controversially exonerated a powerful company on charges of insider trading and price manipulation, despite adequate powers to initiate action. Ironically, it was a Sebi board committee that decided the issue. Cases have also been lost through deliberate mishandling and delays. Such problems are part of all government organisations, but it is still crucial for the regulator to be empowered to check corporate mischief when they are dipping into investors pockets.