Direct equity investing has always been viewed as being highly risky due to its volatile nature. But despite it being so, many investors often evince interest in the asset class and often fancy investing in IPOs expecting short-term gains. While few value propositions do indeed deliver good returns, there are many which turn out to be disastrous for investor's hard earned money Also, if the IPO is considered to be safe and promising; there are instances where the retail investors simply get very less chance, since most of them get oversubscribed.
Citing the anomalies in the primary market, now, the capital market regulator - the Securities and Exchange Board of India (SEBI) has notified wide-ranging reforms in IPO market, including a strict vigil on usage of issue proceeds, greater disclosure by companies and their bankers and allotment of a minimum number of shares to retail investors.
According to SEBI, a company would also have to open the issue at least three working days from the date of registering the red herring prospectus with the Registrar of Companies (ROC). Moreover, the companies would have to disclose the price band at least five days before the opening of the offer period, as against the current provision of two days; thereby giving investors more time to analyse the IPO.
Some of the other reforms in the IPO process brought out by the SEBI are:
- Issuer would need to allot a minimum lot of shares to each retail investor
- Retail individual investors to either withdraw or revise their bids until finalisation of the allotment
- Minimum application size for all investors has also been increased to Rs 10,000 - Rs 15,000
- Merchant banker who is an associate of the issuer, would have to limit its role to marketing of the offer and declare itself as a marketing lead manager
- Disclosures made in the red herring prospectus while making an IPO, would need to be updated on an annual basis and made public by the issuer
- Issuers coming through the 'profitability route' need to have a minimum average pre-tax operating profit of Rs 15 crore
Apart from the above, the SEBI's notification states that no company can deploy more than 25% of the public offer proceeds in the name of 'general corporate purposes'. Besides, any issue-related expenses cannot be considered as a part of 'general corporate purpose' merely because no specific amount has been allocated for such expenses in draft offer document.
We are of the view that, the initiative taken by the SEBI will help the retail investors in making a well informed decision while investing in Initial Public Offerings. Moreover, the enhanced disclosure norms will make sure that only genuine players are given access to the equity markets, thereby safeguarding investors' interests. Such a conducive environment will help improve the retail participation in the equity markets.