MoF, Sebi move to revive primary market

This recommendation was suggested last week by the SEBI-constituted Advisory Committee on Primary Markets headed by M S Verma. An approval is expected in the next board meeting of SEBI.

The Committee had recommended that the continuous three-year dividend payment record be replaced by a new norm which says that a company should have the ability to pay dividends overthe period concerned before being allowed to come out with a premium issue. In other words, only profit making companies, and not necessarily dividend paying, will be allowed to tap public funds at values which are above par.

The finance ministry had so far been opposed to bringing down entry barriers in the primary market in the fear that a rush of public issues could mean the beginning of a new stock market scam. But subsequent to the budgetary incentives given to the mutual fund industry and the buoyancy in the stock markets, the ministry seems to be keen to ensure a steady supply of new shares into the market.

One way of doing this, it seems to now agree, is to revive the primary markets by bringing down entry barriers. In this context, the ministry is in discussion with SEBI and is likely to drop its objections to the removal of some of the entry barriers. The other entry barrier, that a section within SEBI seems to be seriously thinking of removing, is the requirement that 10 per cent of a company8217;sdebt or equity must be subscribed to either by a bank or by a financial institution before it is allowed to tap the public issue market.

The argument for doing away with this caveat is that banks and FIs may not be willing lenders or subscribers to premium issues. They may not agree to shell out the premium demanded by the promoter or may refuse to lend to the company. What is more, such a condition curtails the promoter8217;s choice of debt-equity mix in his project.

But SEBI and finance ministry brass is not convinced yet about doing away with the 10 per cent requirement. The argument in favour of retaining this condition is that a promoter can be kept under check from inflating project costs or taking investors for a ride through a high premium issue if banks or FIs also participate in the entire exercise.