Looking to protect the interests of retail investors, market regulator Sebi today issued draft norms for mandatory safety net mechanism in IPOs.
The market regulator has sought comments from the public on the draft norms till October 31.
According to Sebi, the safety net mechanism would be available for all securities allotted to original resident retail individual allottees, who had made an application for up to Rs 50,000.
"The total obligation on safety net provider will be capped at five per cent of the issue size," the market regulator said.
Noting that it would be mandatory for all IPOs, Sebi said the safety net provision would be triggered in cases where the price of the shares have depreciated by more than 20 per cent from the issue price.
"The price for this provision shall be calculated as the volume-weighted average market price of such shares for a period of three months from the date of listing," it said.
Further, the 20 per cent depreciation in share price would be considered over and above the general fall, if any, in market index.
The market index for this purpose may be BSE-500 or S&P CNX 500 and the index to be considered for this purpose should be disclosed in the offer document.
The proposal for such a mechanism, discussed at Sebi's board meeting held on September 16, is aimed at protecting the interest of retail investors.
According to the board, besides disclosures, other measures are needed to bring in self-discipline in IPO pricing and one of the steps to protect the interests of small investors is a safety net mechanism.
There is already a voluntary safety net mechanism in place for IPO investors.
In the discussion paper on safety net mechanism issued today, Sebi said an analysis of price performance of the scrips listed during 2008 to 2011 period showed that out of 117 scrips, 72 (around 62 per cent issues) were trading below the issue price after six months of their listing.
"Out of those 72 scrips which witnessed fall in price, in 55 scrips the fall was more than 20 per cent of the issue price. In this scenario if the trend continues, the sentiments of the investors would get affected and they may lose confidence in the capital market," it said.
Thus, there is a need to provide safety net arrangement for retail individual investors to build their confidence in capital market, Sebi noted.
Sebi said the issuer or the Book