Sai Silks which is opening its IPO to raise Rs 89 crs in a price band of Rs 70-75 from Monday the 11th February is offering a voluntary safety net to retail investors. The issue closes on Wednesday the 13th of February. The salient features of the voluntary safety net are as follows: –

• The scheme is being offered by the promoter and promoter group and is eligible for original individual retail shareholders only.
• The safety net is for these individuals with a cap of 1,000 shares per investor.
• The duration of the scheme would be six months from the date of credit of the equity shares in the demat account of the original retail investor.
• The scheme for safety net would get triggered if there is a single trade on any day below the IPO issue price. The day the same is triggered it would remain in force till the entire period of six months or the remaining part of six months is over.
• Retail investors do not have to offer their shares immediately after the trigger has happened but may do so in the period that the scheme is open.
• The method of execution of sale under safety net would be by way of off-market transaction into a designated depository account.

This scheme is a win-win situation for retail investors. It is akin to a call option for six month duration and that too with zero cost. The retail investor has an option to sell in the markets whenever he feels like and make profits when the share trades at a premium to the issue price. In the unfortunate circumstance that the same is trading at a discount to the issue price, he has an option to surrender the shares to the promoter/promoter group and recover his costs. Another way of looking at it is that he has the commitment of the promoter to buy at a fixed price (issue price) for six months while the investor is free to take this commitment or choose to ignore the same by selling in the market.

The success of this IPO would be greatly influenced by this voluntary safety net as in the last 4-5 years more than 3/4th of the IPO’s are trading at a discount. SEBI has put out a white paper for compulsory safety net which is heavily loaded in favour of the issuer of capital and against the interest of the retail investor. It talks of a safety net which kicks in only if the price falls below 20% and that too adjusted for broad market fall.

Let me explain by example how the safety net would operate in the case of Sai Silk. The issue closes on the 13th of February which means the shares are likely to be credited into the demat accounts by the 25th or 26th of February. Trading would commence on the 27th of February if not earlier. Assuming the IPO allotment price is at the top end of the band at Rs 75, if any day thereafter till the 24th of August 2013, the share price falls below Rs 75 to say even Rs 74.95 on either the BSE or NSE, the safety net would be triggered. It does not make any difference if the price thereafter recovers or not. Further the safety net once triggered remains in force until the duration expires.

I believe this scheme is in the interest of retail investors and offers capital protection for six months and an opportunity to make money.