In the last few years, the Securities and Exchange Board of India has made far-reaching changes to its public issue guidelines to make the primary market a safer place for the small investor. Following the dismal returns delivered by the Initial Public Offers of 2007-08 and instances of primary market fraud in 2011, SEBI tightened its own processes for vetting offer documents, cracked down on price manipulation post-listing, asked merchant bankers to disclose their track record, and even expedited the time-frame for IPO allotments so that investors didn’t have to endure long waits. While these measures have no doubt delivered better investor protection, it may be time for the regulator to introspect whether, in the process, it has set the bar too high for new issuers. Even as most other global markets witnessed resurgence in their new issue activity in 2014, the Indian primary market has remained somnolent, with only 6 of the 1,013 new listings on the global bourses last year originating in India.

A moribund primary market can have several adverse implications for corporate India and the health of the domestic financial markets. For one, it is IPOs rather than buoyant secondary markets which usually draw first-time investors into equities and enhance retail participation in financial assets. The last time Indian depositories added a record number of demat accounts was during the IPO boom of 2007-08. Two, a strong pipeline of new listings is essential to ensure that the listed universe remains contemporary and reflective of the changes in the underlying economy. Today, sectors such as e-commerce, retail, travel and hospitality are attracting big ticket foreign and domestic investments, but their representation in the public markets is minuscule. If firms in high-growth sectors continue to shun public markets, not only will the listed universe lack vibrancy, but public disclosures — which are a key input to policymaking — will be a casualty too. Further, quite a few Indian companies, including public sector firms, are in dire need of equity capital or de-leveraging and the primary market is critical to their revival.

Given this backdrop, policymakers should reach out to leading unlisted firms to gauge exactly why they have been fighting shy of going public, and listing themselves on stock exchanges. SEBI need not relax its vigilance on prospectus-related disclosures or on merchant banker accountability, but it could certainly review its onerous preconditions for companies looking to make an IPO. SEBI today lists as many as seven preconditions that new issuers need to meet (including minimum monetary limits on assets, operating profits and net worth, and a three-year track record of distributable profits), failing which they need to take the compulsory book-building route. Compulsory book-building carries rigid quotas for different classes of investors (up to 75 per cent is reserved for institutions) which issuers often find difficult to meet. Relaxing some of these norms may give a leg up to the primary markets, without materially diluting the protection available to small investors.

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