Two recent ‘investor-friendly’ moves by the Securities and Exchange Board of India (Sebi) in the primary market have spooked market players and potential issuers. While Sebi says the moves are aimed at protecting investors from potential losses, issuers are worried some provisions could alter the fundamental attributes of equity as a risk asset, delivering a death blow to a market that is already struggling.
Last week, Sebi issued rules for rejecting draft offer documents of companies that did not meet its standards on several criteria. Last month, it floated a discussion paper on the safety net provisions for individual retail investors, through which companies have to buy back shares at the issue price in case of a steep fall, following listing.
Experts said these measures would make it more challenging for bankers and issuers to bring new companies to the market. So far this financial year, only Rs 770 crore has been raised from 19 issues, according to Prime Database.
|TIGHTENING THE SCREWS
Sebi has issued rules for rejecting draft offer documents and has floated a discussion paper on safety net in IPOs. Key highlights on the two:
|Offer document rejection framework
- Quality of disclosures inadequate
- High risk associated with the issue
- Ultimate promoters unidentifiable
- Proceeds are used towards repayment of loan or inter-corporate deposits
- Business model of companies exaggerated, complex or misleading
- Sudden spurt in financial performance of a company ahead of filing
|'Safety net' framework (proposed)
- To be triggered if stock underperforms broader market by 20%
- Price to be calculated on volume-weighted basis
- Maximum refund on up to Rs 50,000 investment
- Maximum total refund to be 5% of issue size
- Provision available for three months post-listing
The moves may also lead to a rise in litigation, as the rejection rules provide discretionary powers to Sebi. B Madhuprasad, executive vice-chairman, Keynote Corporate Services, which specialises in small-size initial public offerings, says, “The rejection framework will give rise to SAT (Securities Appellate Tribunal) matters. More issuers will now go to SAT to appeal against Sebi’s rejection grounds. The concept of a safety net is unheard of in equity markets across the world.”
Bankers say some rejection criteria are vague and all-encompassing. For instance, Sebi says it would reject companies with business models that are “exaggerated, complex or misleading, and the investors may not be able to assess the risks associated with such business models.”
Other such criteria are so common that practically everyone would be rejected. The order says the offer document can be rejected if the purpose for which the majority of the issue proceeds would be utilised “is vague”; hundreds of companies have raised money from the market for “general corporate purposes”.
Experts fear this may lead to a situation in which people do not stop ‘bad-boy’ activities, but simply stop disclosing those. There are also doubts on whether Sebi has the resources to detect cases of non-disclosure/wrong disclosure/cleverly-worded disclosures.
Somasekhar Sundaresan, partner, JSA, said, “Sebi could have shot itself in the foot with this regime. When Sebi does not reject an offer document, it would only be logical to assume (regardless of the disclaimers it may write) that Sebi has been adequately satisfied the issuer’s business model is not exaggerated, complex or misleading, and that investors are able to assess it well.”
Madhuprasad added bankers would have to be very conscious with disclosures and the company’s business model. “They cannot exaggerate. It is not necessary to put so many prerequisites, when monitoring so many things would be difficult at Sebi’s end,” he said.
However, Prithvi Haldea of Prime Database said these measures were necessary because of the conduct of issuers. “The world over, a principle/disclosure-based system has not worked. People are focused on the short term and greedy. Therefore, everything has to be prescribed. We are all moving towards a rules-based system. It is inevitable.”