There is a lot happening in the initial public offering (IPO) market, except, unfortunately, money raising. Last week, in an unprecedented move, the chairman of the Securities and Exchange Board of India (Sebi) passed a general order (G.O, in government parlance) under his own name, laying out provisions for rejection of offer documents filed by companies.
The order lays criteria for rejection under capital structure, objects of issue, business model, financial statements and litigation. It even contains a residual clause, giving Sebi powers to extend the scope of scrutiny beyond five years before the company comes for listing.
While it will be interesting to understand why such an important move had come through a G.O, just three days after a board meeting in which a number of “market-friendly measures” were announced, the move is the most significant policy departure made by Sebi in recent years. It seems there is a move towards a merit-based, rules-driven regime, like we saw in the mutual funds space a few years ago. Sebi had till now followed a disclosure-based, principles driven regime for IPOs. Accordingly, Sebi did not regulate on merits or approve, document of offer/issue of securities. It only mandated disclosures. It did not “approve” IPOs, it only issued observations. It was for the investor to read these disclosures carefully and make an informed decision.
The G.O comes on the heels of a draft paper on “safety net mechanism”, which the Street feels is a throwback to Controller of Capital Issues (CCI) days as it seeks to curb the freedom in pricing. The government officer decided who will raise money, how much money he will raise and by selling how many shares.
Under the CCI regime, companies were not allowed to issue shares at a premium. Therefore, huge projects which needed huge sums of capital could not be mobilised since shares issued at face value led to a heavy dilution of capital making the issues unviable. Even in those days smart minds got around by buying laggard companies, ramping up the share prices and then raising money through follow-on offers.
While fresh issues had to be at par, follow-ons can be closer to the market price. Convertible debentures were also used cleverly to circumvent the draconian CCI rules. With the advent of Sebi, the playing field got leveled. Anyone could raise money by selling shares at a premium, without taking circuitous route and without feeling guilty about it. All Sebi wanted was “true, fair and adequate disclosures”.
But that regime seems to be all over. By spelling out terms of rejection, Sinha has created an IPO approval process. It is not clear though if he has done it consciously or unwittingly. When asked in a recent conference, whether these rules will shoo away IPO-bound companies, Sinha said something on the lines that media can’t have it both ways: First, you can’t say that there is no investor protection and then when something is done you can’t turn the argument around saying it will stifle the market, he asked a baffled TV reporter.
Unfortunately, while the media can occasionally get away having it both ways, Sebi can't. Sebi has to balance. Methinks, the founding fathers of Sebi always knew it was a tight-rope walk. That is why they put investor protection and market development, one beside the other in the preamble. For, if there was no investor, whom will you protect?