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Journalism of Courage
Market regulator Sebi today deferred a decision on providing a ‘safety net’ guarantee to investors buying shares through initial public offerings (IPOs),while saying that more discussion is required on such a mechanism.
“The idea of safety net was discussed today. But,Sebi felt that further larger consultation is required and final view will be taken after that,” Sebi Chairman UK Sinha said after the board meeting.
The ‘safety net’ is one of the key proposals being discussed by Sebi for its primary market reforms. The regulator is of the view that it would help in fair pricing of IPOs,besides providing investors some sort of a capital protection guarantee.
According to sources,under the proposed mechanism,a certain portion of the investment made by retail shareholders in the IPOs could be guaranteed for a fixed period,which could be for six months,even if the shares’ value plunge below the IPO allotment price during this time.
This ‘safety net’ mechanism was being considered only for the small retail investors,who would be compensated by the promoters and other entities selling shares through IPOs in the event of the company’s shares plunging below a certain threshold limit within six months of listing or the time frame
set by Sebi,sources added.
As per the current regulations,the companies are allowed to voluntarily provide such ‘safety nets’ in their IPOs,but it is not mandatory for them to make such provisions and only a few companies have provided such facility for investors in the past.
Many companies and investment bankers have come under criticism of over-pricing IPOs after the shares fell below the public offer price levels in several cases.
Sources said the companies could be allowed to pass on the costs of ‘safety net’ provision to the investment bankers,who are primarily responsible for fixing the price of shares to be sold through IPOs.
