(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.
- 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
- For previous columns by the author, Reuters customers can
(Editing by John Foley and Katrina Hamlin)