Safety net would have hit 25% IPOs since '08

A hypothetical back-testing of the Securities and Exchange Board of India (Sebi)-proposed 'safety net' framework shows one in every four initial public offerings (IPO) since 2008, when the market hit a peak before slumping into a rough patch, would have had to refund money to investors.

According to an analysis by the Business Standard Research Bureau, 43 of the 175 IPOs since 2008 which have seen a sharp fall in share prices in the first three months of listing would have had to refund money to small shareholders, according to the framework laid out in Sebi's discussion paper.

According to the paper, 'Mandatory Safety Net Mechanism', floated by Sebi last month, if a volume-weighted average market price of a newly-listed stock for a period of three months from the date of listing, depreciates by more than 20 per cent from its issue price or if the fall in the stock price is 20 per cent more than the fall in the broader market, the company will have to refund money to investors.

The regulator, in its discussion paper, has highlighted the underperformance of IPOs in the last few years, saying it had hurt investor confidence. It has argued such a provision is needed to rebuild investor confidence in the capital market.

The safety net has been contemplated as a measure to restrict aggressive pricing by companies, which result in losses for investors. However, it has led to criticism that it fundamentally alters the nature of equity as a risk asset.

Prithvi Haldea, chairman and managing director, Prime Database, said: "Fundamentally, a safety net for equities is an antithesis. However, exceptional circumstances call for exceptional measures. Retail investors have virtually disappeared from the market. A safety net will give them some comfort that there is a buyback. It will bring in some sanity for pricing an issue."

According to the analysis, the daily volume-weighted average price of 43 companies, including A2Z Maintenance, PTC India Financial Services and Orient Green Power, have declined more than 20 per cent in the first three months or have seen a more than 20 per cent fall than the BSE 500 index.

Barring these few big names, most companies that would have had to refund money to investors are smaller ones with an IPO size of less than Rs 200 crore. Four of seven companies banned by Sebi last year for irregularities in the IPO process also feature in this list.

Reliance Power, which had raised about Rs 11,700 crore from investors in January 2008, misses by a small margin. The volume-weighted average price in the first three months for R-Power is Rs 374.8, which is about 17 per cent below its issue price of Rs 450 (not adjusted for the stock split).

Sebi has invited comments on the discussion paper till the end of this month.