Sebi unveils IPO safety draft norms

According to Sebi,the safety net mechanism would be available for all securities allotted to original resident retail individual allottees,who had made an application for up to Rs 50,000.

“The total obligation on safety net provider will be capped at five per cent of the issue size,” the market regulator said.

Noting that it would be mandatory for all IPOs,Sebi said the safety net provision would be triggered in cases where the price of the shares have depreciated by more than 20 per cent from the issue price.

“The price for this provision shall be calculated as the volume-weighted average market price of such shares for a period of three months from the date of listing,” it said.

Further,the 20 per cent depreciation in share price would be considered over and above the general fall,if any,in market index.

The market index for this purpose may be BSE-500 or S&P CNX 500 and the index to be considered for this purpose should be disclosed in the offer document.

The proposal for such a mechanism,discussed at Sebi’s board meeting held on September 16,is aimed at protecting the interest of retail investors.

According to the board,besides disclosures,other measures are needed to bring in self-discipline in IPO pricing and one of the steps to protect the interests of small investors is a safety net mechanism.

There is already a voluntary safety net mechanism in place for IPO investors.

In the discussion paper on safety net mechanism issued today,Sebi said an analysis of price performance of the scrips listed during 2008 to 2011 period showed that out of 117 scrips,72 (around 62 per cent issues) were trading below the issue price after six months of their listing.

“Out of those 72 scrips which witnessed fall in price,in 55 scrips the fall was more than 20 per cent of the issue price. In this scenario if the trend continues,the sentiments of the investors would get affected and they may lose confidence in the capital market,” it said.

Thus,there is a need to provide safety net arrangement for retail individual investors to build their confidence in capital market,Sebi noted.

Sebi said the issuer or the Book Running Lead Manager (BRLM) has to announce the triggering of the safety net provision and invite eligible shareholders to tender their shares.

The triggering of safety net mechanism has to be announced within three days from the date of completion of three months from listing date.

“Safety net arrangement shall be open for 10 working days from the date of announcement. Eligible investors may tender their shares to safety net provider under the scheme during this period. The shares so tendered shall be kept in escrow account till successful settlement of shares and funds,” Sebi said.

The settlement of shares and funds should be be completed within 10 working days of the completion of the last date for surrender of shares by eligible shareholders.

“Eligible investors may tender their shares through a separate exchange window (similar to buyback of shares)…. The primary safety net obligation would rest with the promoters of the issuer,” the discussion paper said.

The arrangements made for the purpose of meeting the safety net obligation shall be disclosed in the offer document.

According to Sebi,the total obligation on safety net provider would be capped at five per cent of the issue size.

“In case the total number of shares offered under the safety net scheme works out to be more than 5 per cent of issue size,the purchase of securities from original resident retail individual allottees shall be done on proportionate basis such that total obligation does not exceed 5 per cent of the issue size,” it added.