The idea of a safety net for small investors is not a new one; there have been times in the past that Sebi has brought up the subject in discussion papers. It has been concerned about the performance of stocks post-listing; from a sample of scrips listed between 2008 and 2011, it was seen that of 117 scrips, 72 were trading below the issue price after six months of listing. Of these, the fall for 55 stocks was more than 20%. While Sebi believes there should be some kind of safety net mechanism, it hasn’t translated into any strong regulations so far. What Sebi has done, and rightly so, is to ensure there isn’t any mis-pricing of the issue by making sure there is relevant information on the track record of merchant bankers in the prospectus. It is, therefore, surprising that Sebi would want to consider asking companies debuting on the bourses to issue optionally convertible debentures instead of shares.
Equity is about risk, and therefore it is conceptually untenable that investors’ downside should be protected. Regardless of how much the price falls—Sebi had suggested a level of 20% within three months of listing—promoters should not be asked to mandatorily compensate investors. There are companies, like Just Dial, that have voluntarily provided a safety net. There is the interesting case of Sai Silk which had said it would buy back shares if the market price of the stock fell below the issue price any time within 6 months of their being credited to the investors’ demat account, with a cap of 1,000 shares; however, since there weren’t enough institutional buyers, the issue was subsequently withdrawn.
The Facebook stock, which made a stunning debut on NASDAQ, took a tumble, falling all the way to $17.5 apiece from a high of $45—had a safety net been in place in the US, a Facebook would have had to compensate investors for this fall! Unless they understand the risks of owning stocks, small investors should opt for the mutual fund route—the current rules on disclosure of merchant banker track records is enough of a safety valve.