The Securities and Exchange Board of India may soon ask companies and merchant bankers to limit any business transactions among them to bare minimum and to provide investors with a detailed analysis of how they discover the IPO price range.

The proposed steps are aimed at safeguarding the investors’ interest and ring-fencing the Initial Public Offer (IPO) market from possible over-pricing of the public offers through a nexus between the company promoters and merchant bankers, a senior official said.

The SEBI has already made it mandatory for the merchant bankers to provide a track-record of the offers managed by them, while it has also announced steps like stricter eligibility criteria for tapping the capital markets through IPOs.

Capital protection guarantee

Besides, a proposal is already underway to ask the promoters and merchant bankers to provide a capital protection guarantee for a certain period to part of the shares allotted to retail investors in IPOs through a mandatory ‘safety net’ provision.

The SEBI is considering further IPO reforms as part of its efforts to revive this segment as a preferred investment route for the retail investors, which used to be the case till a few years ago, but the situation has changed after a dismal post-IPO performance of many companies in recent years, the regulatory official said.

IPO manipulation

While investigating certain cases of IPO-related irregularities, SEBI came across instances of some promoters and merchant bankers together manipulating the public offers, as well as the post-listing share trades.

In some cases, the IPOs were priced way above the fundamental value of the shares, but the companies managed to sell the shares with support from ‘friendly’ entities and later gave them an opportunity to exit by keeping the share price inflated for some time after listing.

However, the shares came crashing down afterwards, leaving genuine investors in lurch and with heavy losses, the official said.

Unfair trade practices

With an aim to check such unfair and fraudulent trade practices, SEBI is also considering checks against the companies and merchant bankers from IPO market if they are found to have had any direct or indirect business dealings beyond a permissible limit.

The companies aspiring to come out with IPOs would also need to make a full disclosure of all their related party transactions and the merchant bankers managing the deal would have to conduct a strict due diligence on such transactions, while certifying the extent to which such transactions contribute to the overall business profit of the issuer.

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