To improve investor confidence in IPOs, Sebi has made safety net arrangement for retail individual investors mandatory. Here is how the net works in case the issue tanks
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