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View: Why IPO investment by small investors must be indemnified

Mini

It is amazing SEBI capitulated to the orchestrated clamor for dismantling the safety net for small investors. It had earlier consciously drawn a distinction between small and other investors and thus blazed a trail.

View: Why IPO investment by small investors must be indemnified
Two enduring myths have been holding sway over the rarified financial world for more than a century now:
1. Auditors are watchdogs and not bloodhounds; and
2. Equity investors of all shades have to stew in their own juice.
The first one in fact was the House of Lords pronouncement in the famous Kingston Cotton Mills case of the yore which the auditing profession the world over had latched onto with alacrity to save their skins when hauled over the coal for lapses though of late governments have been trying to read the riot act with stricter regulations to deny auditors wiggle room.
The smug assertion that all equity investors are alike and hence have to take risks born out of equity investments in their strides is not only disingenuous but also delusional. Promoters are different from small investors. Angel investors, anchor investors, and venture capitalists of the world court risk with their eyes wide open both to encourage latent talent and also to profit from such risk-taking. Nothing wrong with it but to say that small investors too belong to the same genre is far from reality.
This is why our market regulator the SEBI initiated two seminal measures for which it was lampooned and had to throw the baby with the bathwater. More than 12 years after it was introduced in the Indian capital market, the SEBI had on June 24, 2018, brought the curtains down on what could perhaps be termed one of its most criticized moves in the primary market — grading of initial public offers (IPOs). IPO grading was first introduced as an optional feature in April 2006 but later made mandatory in May 2007. Again, it was made voluntary in 2013 before it was altogether abolished. It was a novel attempt, the one that wasn't tried anywhere else in the world but it failed because it expected rating agencies to rate on a scale of 5 without being allowed to pronounce on the premium charged by the issuer. Indeed the bone of contention has always been the mindboggling premiums one witness in Indian IPOs. Therefore it was a senseless exercise akin to asking a boxer to fight with his hands tied behind his back.
But not at all senseless was the other optional requirement the SEBI abolished on the same day, June 24, 2018, -- safety net for the small investors. Safety Net was a voluntary scheme where the company promoters assured that they will buy back shares from the retail applicants at the IPO price if its stock fell during the first six months after listing. It was proposed by the market regulator SEBI in 2012. Its study showed that 62 percent of 117 companies listed between 2008 and 2011 fell below IPO price within the first six months of listing. The regulator could not make it mandatory after the proposal — the first of its kind anywhere in the world like its earlier IPO rating move — met with strong criticism from investment bankers. What is more even the pretence of an optional safety net has been thrown out of the nearest window.
There was nothing wrong with the safety net scheme except its optional character which made merchant bankers sneer at it. Only one company, Just Dial, boldly courted it. In India, as indeed in many other countries, no voluntary measure works. The safety net mechanism was criticised mainly on the ground that equity investors invest with their eyes wide open. Ergo no sympathy needs to be shown to them. This stems from the convenient and deliberate lumping of all equity investors as a monolithic and homogenous category. The truth as pointed out earlier is equity investors are as heterogeneous as lenders. SEBI tried to take up cudgels only for the small investors and that too only on 1000 shares per investor at the maximum. This category accounts for just as 15 percent of the IPO subscribers in terms of the number of shares reserved for each category. Yet the powerful lobby of merchant bankers scuttled it.
SEBI toyed with the almost stillborn idea only to check unbridled aggressive pricing of IPOs in the country that makes them extremely risky for the small investors. Zomato and Paytm are still nursing losses but that is par for the course in the Indian IPO market in the vicelike grip of merchant bankers and QIBs. In their worldview loss is the harbinger of future profits. Maybe but shouldn't their vaulting optimism be reined in by a modicum of regulation? What is wrong in mandating that merchant bankers, QIBs, and company promoters who invariably use the OFS platform to ride piggyback on IPO would have to pro-rata buy out small investors should the market price dip below the offer price during the first three months if not six months?
Heavens would not fall if such a mandatory safety net mechanism was unfurled. On the contrary, it would bring sanity into IPO pricing and endear equity investment to small investors. It is perfectly in keeping with the modern-day precepts -- polluter pays and eats what you cook. A promoter who basks in the glory of commanding a large sliver of huge market capitalization should not balk at the prospect of tempering his/her enthusiasm with sobriety nor should she resent its flip side.
If a small investor is singed during her dalliance at the bourses, she has herself to blame but if she is singed at the altar of IPO, she must get redress. Whataboutery i.e. other countries do not have such a measure is not the answer. Somebody has to blaze the trail.
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