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

(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:

"India's Daughter"

Reuters Showcase

Microfinance

Microfinance

Funding the unfunded: India helps small business borrow to grow  Full Article 

Insurance Sector

Insurance Sector

UK healthcare firm Bupa sees strong growth in India  Full Article 

Sensex Rises

Sensex Rises

Sensex edges up; consumer and healthcare stocks rise  Full Article 

Market Eye

Market Eye

FTSE adds nine Indian firms as large-caps in Asia-Pacific ex-Japan index   Full Article 

Indian Ocean Diplomacy

Indian Ocean Diplomacy

PM Modi to ramp up help for Indian Ocean nations to counter China influence  Full Article 

ECB Bond-Buying

ECB Bond-Buying

ECB raises growth forecasts, to start printing money next week  Full Article 

China Economy

China Economy

China signals "new normal" with lower annual growth target  Full Article 

Pharma Sector

Pharma Sector

Panel recommends waiving late-stage trials for some drugs  Full Article 

E-commerce

E-commerce

China backs e-commerce expansion in win for Alibaba, JD.com  Full Article 

Reuters India Mobile

Reuters India Mobile

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