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

Fri Jan 11, 2013 10:12am IST

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

By Andy Mukherjee

SINGAPORE, Jan 11 (Reuters Breakingviews) - Indian regulators have 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.

The Securities and Exchange Board of India, which has floated the idea, 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 ($2 billion) 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 Indian market regulator plans to implement a safety net for retail investors in initial public offerings, UK Sinha, the chairman of Securities and Exchange Board of India (SEBI), said on Jan. 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.

- Reuters: Investors welcome Indian regulator's proposals on share buyback

- For previous columns by the author, Reuters customers can click on

(Editing by John Foley and Katrina Hamlin)

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

  • Most Popular
  • Most Shared

Trade Deal

REUTERS SHOWCASE

Record High

Record High

Nifty hits record high on foreign buying, higher Asian stocks.  Full Article 

Bullish on Equities

Bullish on Equities

Bullish on Indian equities, but gains seen 'less sharp'- Goldman Sachs  Full Article 

Facebook Results

Facebook Results

Second quarter revenue increases 61 percent  Full Article 

BRICS Bank

BRICS Bank

World Bank chief welcomes new BRICS development bank.  Full Article 

Streamlining Operations

Jet Streamlines

Jet Airways chairman says looking to restructure debts, talking to bankers  Full Article 

Political Economy

Political Economy

Analysis - Watch what markets don't do as world politics turns nasty   Full Article 

Photo

Honda's India Thrust

Honda's India unit to account for 25 pct of Asia Pacific sales by March 2017 - exec   Full Article 

 Boosting Output

Boosting Output

NMDC plans to boost iron ore output by two-thirds  Full Article 

Apple Results

Apple Results

Apple margin concerns fade, focus shifts to iPhone launch  Full Article 

Reuters India Mobile

Reuters India Mobile

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