The Securities and Exchange Board of India will consider this week wide-ranging reforms in its regulations for mutual funds and initial public offers (IPOs), including a ’safety net’ guarantee and tax incentives for new investors.
Various proposals expected to be discussed and approved at SEBI’s upcoming board meeting on August 16 also include introduction of e-IPO, which would allow investors to bid for IPO shares electronically and without any physical paperwork.
According to a senior official, the key proposals for reforms in primary market include introduction of a ‘safety net’ guarantee for investors buying shares through IPOs.
As per the proposed mechanism, a certain portion of the investment made by retail shareholders in the IPOs could be guaranteed for a fixed period, which could be for six months, even if the shares’ value plunges below the IPO allotment price during this time.
This ‘safety net’ mechanism is being considered only for the small retail investors, who would be compensated by the promoters and other entities selling shares through IPOs in the event of the company’s shares plunging below a certain threshold limit within six months of listing or the time-frame set by SEBI.
As per the current regulations, the companies are allowed to provide such ‘safety nets’ during their IPOs, but it is not mandatory for them to make such provisions and only a few companies have provided such facility for investors in the past.
SEBI is of the opinion that a mandatory ‘safety net’ provision would also help in fair pricing of IPOs, besides providing investors some sort of capital protection guarantee.
Many companies and investment bankers have come under the criticism of over-pricing of IPOs after their shares fell below the public offer price levels in several cases.
It has been known that companies could be allowed to pass on the costs of ‘safety net’ provision to the investment bankers, who are primarily responsible for fixing the price of shares to be sold through IPOs.