Saturday, January 12, 2013

A Great Proposal by SEBI

As you might already be aware, Securities and Exchanges Board of India (SEBI) is the Governing body of all stock market related activities in India. Majority of the IPO’s that came out in the past 2 years have disappointed investors wherein the stock price tanked by a significant % on or immediately after listing. Retail Investor confidence in IPO’s has come down because of such examples. And then, there are some cases where the promoters went missing after the IPO and left investors in the lurch. Remember the article titled List of 87 Companies that Vanished after Raising funds through IPO?

As a result of this, the stock market regulator SEBI is currently mulling over a possible guideline that could protect the interest of the investors. This is a great proposal and the purpose of this article is to elaborate on the same!!!

What is this Proposal?

SEBI is considering options wherein investors will be reimbursed all or part of their investment if an IPO fails.

There are a lot of if’s and but’s surrounding this proposal and nothing concrete has been finalized yet, but, according to the news going around in the market, we can expect a few radical rulings that can help the retail investor.

These rulings could include things like:

1. A lower cut-off which if a stock price hits within the first few months after listing, the investor would have the right to claim a refund

The cut-off is expected to be a 20% fall within the first 2-3 months after listing
2. An upper cut-off on the amount of funds that will get reimbursed

The cut-off is expected to be Rs. 50,000/- per IPO


The WHY part of this proposed rule is multifold. Let us look at some of the reasons one by one along the justifications…

Reason 1: Add a safety net or safety feature that would help attract more retail investors

Justification: A majority of the investors in India stay away from the equity markets, esp the IPO segment because of fears of loss. Many of the IPO’s in the recent past have tanked by 70% or 80% from their issue price which has significantly dented the confidence of investors. SEBI Feels that, if they add in such a safety feature wherein an investor could get all or part of his investment refunded in case of an IPO performing poorly, they would be more willing to subscribe to IPO’s

Reason 2: To control blatant overpricing of Shares

Justification: A lot of IPO’s come out wherein experts feel that the issue price is significantly higher than what the stock is worth. The reason according to SEBI as to why company’s come out with such issues is because company’s feel they can command a premium due to their name and most importantly nobody can do anything to them if the stock price tanks after the share gets listed. So, the company stands to pocket the money raised via the IPO and the investors are left to settle with losses. SEBI Feels that if such a refund feature is introduced, company’s will price their IPOs properly and not overprice them

My Take on this proposed Rule:

I feel that that is still a lot of untapped potential in the common Indian household when it comes to savings/funds available for investment. Because of the risky nature of investments, majority of investors in india prefer to stay away from the Equity markets and invest in safer options like Bank FD’s or NSC, PPF etc. If investors are given a safety option wherein they can apply for a refund if their investment isn’t performing as well as expected and salvage all or part of their investment, I feel that more and more people will begin investing in the stock market which can go a long way in boosting not only the Indian Stock Market but also India’s economy as a whole…

Try this:

Identify someone in your friends/family who is extremely averse when it comes to investing in the stock market (Someone like my dad – he compares investing in the markets to Gambling and still feels that what I am doing – in terms of investing in the markets is not a great idea).

Give them a choice:

Choice A: Let us invest 1 lakh in FD in the nearby bank which will give us Rs. 1,08,000/- at the end of the year.

Choice B: Let us invest 1 lakh in the upcoming IPO of XYZ Corp which has a huge potential for growth. In one year experts feel that the stock price will go up by at least 25-30%. Moreover, if the stock price falls by more than 20% in the first 3 months then, the company itself will re-purchase all the shares we bought at 90% of the original price we purchased. So, in the unlikely chance that the stock price tanks, we will get 90% of our money back.

Which one would you prefer…

I am pretty sure that most of those stock market averse people too would choose choice B because of the safety net feature that SEBI intends on bringing.

So, personally, I feel this is an excellent move by SEBI and I hope this becomes a rule very soon…

Happy Investing!!!

1 comment:

  1. Good article. I agree these are some very good initiatives by SEBI and will definitely encourage more people to invest in the stock market. Most investors (especially middle class) in India like to play safe with their money and don’t dabble in stock markets or any other scheme where there is a certain risk involved. this proposed safety net may finally be able to tempt these people to cross the line.


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