BREAKINGVIEWS - India's plan to shield IPO investors has merit

Fri Jan 11, 2013 10:53am IST

An employee counts Indian currency notes at a cash counter inside a bank in Kolkata June 18, 2012. REUTERS/Rupak De Chowdhuri/Files

An employee counts Indian currency notes at a cash counter inside a bank in Kolkata June 18, 2012.

Credit: Reuters/Rupak De Chowdhuri/Files

Related Topics

Priyanka Gandhi Vadra, daughter of Congress party chief Sonia Gandhi, adjusts her flower garlands as she campaigns for her mother during an election meeting at Rae Bareli in Uttar Pradesh April 22, 2014. REUTERS/Pawan Kumar

Election 2014

More than 814 million people — a number larger than the population of Europe — are eligible to vote in the world’s biggest democratic exercise.  Full Coverage 

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

SINGAPORE (Reuters Breakingviews) - The Securities and Exchange Board of India (SEBI) has come up with a novel solution to the problem of failed initial public offerings: give small investors who lose money a refund.

The proposal would appear to undermine the basic idea that common shares represent ownership rights - and risks. But unless company owners face consequences for ultra-aggressive pricing, they won't stop abusing their information advantage - and the market for IPOs will remain moribund.

SEBI is right to worry that small investors are being fleeced by insiders with superior information. Between 2008 and 2011, 55 out of 117 Indian IPOs traded at least 20 percent below the offer price after six months of listing.

Bankers have slammed the proposal as a draconian intervention in a free market. But SEBI is not seeking to eliminate the risk of underperformance altogether. Only small investors - those who had applied to buy less than $900 in stock - will be allowed to return their shares at the offer price. The option will only be triggered if both the absolute share price drop and decline relative to the broader market index are 20 percent or more within three months. And majority owners' repurchase obligation will be capped at 5 percent of the IPO size. Insiders will still have an advantage over new investors. But they will be discouraged from using it too blatantly.

Being responsible for ensuring positive trading in the secondary market might scare away a handful of IPO aspirants. But it will prompt those that remain to pay more attention to pricing their offers fairly. It will also put more pressure on investment banks to avoid dud issues.

There's no question that India needs to restore investor trust. Last financial year, households pulled out a net 93 billion rupees from equities and mutual funds. In September, IPOs raised less than $7 million, while rights issues, where the market has already established a price, scooped up more than $1 billion.

It's not yet certain whether SEBI's proposal will be formalised: chairman UK Sinha recently hinted that a "milder form" of safety net might be introduced. But if the final rules are watered down too much, they might be ineffective. And that would defeat the whole point.

CONTEXT NEWS

- The Securities and Exchange Board of India (SEBI) plans to implement a safety net for retail investors in initial public offerings, chairman UK Sinha said on January 9.

- SEBI has proposed giving small investors one chance to return their shares to controlling shareholders, or "promoters" as they are called in India, at the original offer price. The option will trigger if both the absolute drop in the share price and the decline relative to the broader market index are 20 percent or more three months after listing.

(Editing by John Foley and Katrina Hamlin)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Oil Imports

Oil Imports

India to make May-July oil payments to Iran - sources.  Full Article 

DLF Shares

DLF Shares

DLF slides 3 percent, underperforms rivals.  Full Article 

Global Economy

Global Economy

Chinese factories stalling as euro zone business picks up  Full Article 

Rupee Falls

Rupee Falls

Rupee falls for third day; foreign fund inflows key.  Full Article 

Record High

Record High

BSE Sensex hits record high for third straight day.  Full Article 

M&M Upgraded

M&M Upgraded

Credit Suisse upgrades Mahindra & Mahindra to 'outperform'  Full Article 

Breakingviews

Breakingviews

Manchester United’s crisis has silver lining  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage