Sebi to help bring small investors back to IPOs

Written by Sunny Verma | New Delhi | Updated: Nov 8 2011, 08:39am hrs
The Securities and Exchange Board of India (Sebi) plans to set up a committee that will suggest ways to revive the countrys primary market and make it more efficient. The panel will find ways to reduce transaction costs that currently reach a prohibitive 10% for issues below R50 crore, review quotas for various investor categories, study the role of merchant bankers selling an IPO and reduce the gap gap between closing an issue and listing the stock. This will be different from the Primary Market Advisory Committee that advises the regulator on immediate issues of concern.

The regulator has informed the finance ministry of its intention to set up the committee. It will focus on ways to bring back the retail investor who has fled the stock market, particularly the cash segment, thanks to rising volatility, an official source said.

The regulator wants to reduce the time gap between issue closing and stock listing to three days from 12 days at present. This gap was 22 days until May 1, 2010, when it was first reduced. This would mean adopting the format of the secondary market. Prospective investors may be asked to register themselves with depositories and file applications online including payment from banks. This will cut down on the paper processing time. In 2008, a Sebi panel had suggested creating a central integrated platform for electronic IPO applications.

The Sebi decision builds on the recent steps towards a simpler IPO application form, streamlined know-your-customer processes, more disclosures by merchant bankers and simpler language in the issue prospectus. Chairman UK Sinha had said last month that Sebi wants to benchmark Indias IPO process to global standards.

A major concern for the regulator is the cost of issue. While there are no public studies of the costs involved, an informed source said the cost of an issue is usually 10% when the amount to be raised is about R50 crore. The cost percentage dips as the size of the issue rises.

Said Ashvin Parekh, partner and leader of global financial services practice at Ernst & Young: In order to reform the primary market, Sebi should shift its gear from the role of a regulator towards that of developer of the market. There is a need to bring the balance back between investor reforms (which has been overdone), and intermediation reforms and instruments reform. He said Sebi should encourage developments of instruments, which fall between the risk-reward profile of common/preferred equity on the one side, and sovereign AAA bonds on the other.

The committee will also review the 50% quota reserved for retail investors in an IPO. The balance is kept for qualified institutional bidders.

The revenue department of the finance ministry, meanwhile, is already examining the proposal to lower the securities transaction tax (STT) levied at 0.017% for derivatives and 0.125% for non-delivery-based trades. The government feels any revenue shortfall by lowering STT could be compensated by higher turnover. Last fiscal, the government raised Rs 7,500 crore through STT. The tax increases the cost of a share transaction in India compared with jurisdictions without such a tax, including the US and most of Europe.

There is an urgent need to increase retail investor participation in the primary market. Besides reducing the time gap between issue closing and the stock listing, the size of the prospectus should be reduced. It should be less bulky and easier for the investors to grasp, said Jagannadham Thunuguntla, strategist & research head, SMC Global Securities.