The capital market’s most critical functions – help businesses raise money or provide a platform for private entrepreneurs to take their ventures public – are performed by its primary segment. It is, therefore, just right that the Securities and Exchange Board of India (SEBI) should focus on primary market reforms in order to revive investor appetite for equities. The market regulator’s latest tweaks to the initial public offer (IPO) process may go some way towards levelling the playing field for retail investors. But expecting these to immediately boost their participation in IPOs or to deliver better returns than in the past, is somewhat premature.
Nevertheless, many of the changes proposed by SEBI on Thursday are welcome. These include providing for the certainty of allotment of shares to investors who put in smaller sums of money (Rs 10,000-15,000) even within the ‘retail’ category. This, alongside the ban on withdrawal of bids by large investors at the nth hour, should help confer greater integrity to the IPO process. Minimum allotments would ensure that ordinary investors are not sidelined by those who invest large amounts in IPOs, only with a view to making a ‘killing’ on listing. This, apart from discouraging such an unhealthy practice, will also lead to a more equitable distribution of shares. Similarly, the proposed disclosure of price bands five days before an IPO may give lay investors more time to evaluate the offer. Further, limiting fund-raising for ‘general corporate purposes’ and stipulating a minimum Rs 15 crore pre-tax profits for companies making fixed price offers may help raise the bar on the quality of issues in the market. SEBI has, in the same breath though, also mentioned that issuers, who do not meet the above profit criterion, would have to opt for compulsory book-building, with 75 per cent reservation for institutions. SEBI needs to clarify whether this would result in retail investors getting edged out or receiving fewer shares in such offers.
While all these measures are in order, SEBI may, however, be biting off more than it can chew by reserving for itself the right to reject offer documents, if issuers aren’t ‘credible’ or fail to make adequate disclosures. It is not easy to lay down any objective criteria for testing the credibility of promoters that will stand up to judicial scrutiny. Secondly, the regulatory philosophy has all along been that it is for investors to take the final call, with SEBI’s job being one of compelling issuers to make full and fair disclosure to level the field between issuer companies and investors. Any other approach would expose the regulator to civil action seeking compensation for loss of investment value due to negligent performance of duties. The best that SEBI can do is to ensure the IPO process is fair and equitable. It is better to leave the rest for the investors to do their own homework.
Minimum share allotment will ensure lay investors are not sidelined by those with deep pockets.