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Namrata Gada

Mumbai , Oct. 19

Most investment bankers associated with banks see the RBI guidelines on safety net for public issues as not of much consequence to their business.

A `safety net' implies a commitment to buy shares from the original investors during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price.

Most merchant bankers do not offer this option for public issues. "The safety net scheme has been offered for one or two small issues. This definitely does not affect our business," said a merchant banker associated with a bank.

Merchant bankers say only small companies feel the need to offer safety net. "If the company itself is strong enough, it will not need a safety net scheme," said another merchant banker.

In its circular, the RBI had said safety nets were often offered without any request from the company. Also, there was no income for the banks to balance the risk of loss. "Safety net schemes were offered when there was no action in the primary markets and the capital markets was in the doldrums. Investment bankers came up with safety net schemes on fears that the issues would not get fully subscribed. But now these facilities are not used largely," said a merchant banker.

Mr Ananta P. Sarma, Executive Vice-President, IDBI Capital, says that the ruling will affect the retail investor most as it is generally offered to attract them. It will not affect the business of the merchant bankers. "However, the scheme will not take off because other merchant bankers will not have the adequate net worth (paid-up capital and free reserves) to offer," he said. IDBI Capital recently offered the buyback option for Usher Agro's IPO.

However, a second merchant banker said the scheme was a comfort mechanism for the merchant bankers as after the buyback, they generally offloaded the stake to retail investors or mutual funds.

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