SEBI announces mandatory Safety Net Mechanism for IPO’s

October 1st, 2012 Comments Off on SEBI announces mandatory Safety Net Mechanism for IPO’s


SEBI today released a discussion paper for its proposed Safety Net mechanism. The trigger point is 20% price erosion from listing price. The listing price would be calculated as the volume weighted average market price for a period of 3 months from date of listing. Secondly all IPO’s would have to be benchmarked to either the BSE500 or CNX500. Thirdly the safety net would only be available to those retail investors who apply for shares worth Rs 50,000.

At first glance it appears that SEBI is introducing this safety net as an obligation but the entire scheme is designed to benefit just the issuer of capital. The scheme in intent is aimed at minimising the loss that an issuer may have.

Let us analyse the same in detail. The first eligibility criteria is application amount should be Rs 50,000 or less. The retail category in India till a few years ago was Rs 1 lakh and it was just about two years ago considering inflation and the value of money that the limit of retail investor was raised to Rs 2 lakhs. Within this category subdividing the portion eligible for safety net to Rs 50,000 is unfair in spirit. The average ticket size of retail applications is Rs 95,000. This means that those applicants applying for shares worth Rs 50,000 would be roughly 20-25% of the retail portion. The retail portion is 35% of the issue size and taking a maximum of 25% applying for Rs 50,000 the same would come to roughly 9% of the issue size.

The maximum liability of the promoter is limited to 5% of the issue size. To use this amount to the fullest the retail applications not exceeding Rs 50,000, the share would have to fall a minimum of 55% for the money to be used up. What I fail to understand is that this scheme is to protect the issuer of capital or the investor.

The investor to get compensation needs to ensure the following : –
• He must apply for Rs 50,000 or less
• The stock price must fall by 20% or more
• He must ensure that the benchmark index selected by the issuer does not underperform the stock price   otherwise he would not be eligible
• The buyback would be restricted to a maximum of 5% of the issue size
• The period of buyback would be at the end of 3 months from the listing of the share.

The scheme is full of flaws and is heavily skewed in favour of the issuer. The scheme is supposed to protect the investor not the issuer of capital, however here it is the opposite.

I believe the scheme should be completely modified and overhauled. I suggest the following changes in the proposed white paper for discussion.

Changes proposed.

1. The eligibility criteria should be available for all retail investors and should work in the reverse order where the smallest applicant gets full benefit and the largest investor gets the least benefit. For example if there is money available after meeting the claims for investors upto Rs 50,000, then the same to apply to investors upto Rs 1 lakh and then Rs 1.5 lakhs and so on upto Rs 2 lakhs.
2. The scheme has fixed a band of 5% on the issuer of capital. Within this band the money should be distributed so that maximum benefit is available to investors and not to the issuer.
3. SEBI has given benefit of index performance to the issuer in calculating price fall and the same is visible in illustration-2. However in illustration-4 the same logic is not used and SEBI is speaking in favour of the issuer. I believe the 20% trigger should be on the basis of change in price considering index as mentioned by SEBI.

In conclusion it appears this is yet another half-hearted effort from SEBI where the intent is excellent but the formulation of the scheme is meant for only one section of people i.e. the issuer of capital and not for safeguard of minority or small shareholders.

Dear readers I would welcome your comments on the above issue and would forward the same as a suggestion to the regulator. Please forward your views and suggestions to the website by the 25th of October.

The full text of the white paper may be downloaded from here.
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1348839319484.pdf

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Performance of Newly Listed Shares as on 28th September2012

September 29th, 2012 Comments Off on Performance of Newly Listed Shares as on 28th September2012

Name Date of listing Issue Price closing  price closing price % gain loss  change over
28th September 21st September over week  lssue price
VKS Projects Limited 18th July 55.00 76.90 79.85 -5.36 39.82
Thejo Engineering Limited SME NSE) 18th September 402.00 366.00 360.00 1.49 -8.96
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Rajiv Gandhi Equity Savings Scheme

September 24th, 2012 Comments Off on Rajiv Gandhi Equity Savings Scheme

The Rajiv Gandhi Equity Savings Scheme (RGESS) which was announced in the Union Budget in March 2012 has been notified. The government has announced the details of the scheme.

The salient features of the same are as follows: –

Investors who have till date neither invested or traded in equity or derivatives and having taxable income of below 10 lacs are eligible. The tracking points would be PAN card and Demat account. The investment may be made in shares of the BSE100 or CNX100. Further shares of PSU companies which are Navratnas, Maharatnas or Miniratnas are also included. The scheme would also apply for IPO’s, FPO’s of PSU companies going public and having a turnover greater than Rs 4,000 crs for the last three years. Investments in eligible companies could be in the form of equity, ETF and mutual funds.

Investments of upto Rs 50,000 would be eligible for a 50% tax break implying a reduction in taxable income of Rs 25,000. The operating details are that investments made in the beginning would have a lock-in for one year and after the initial period, trading and switching would be permitted as long as the money remains invested in the scheme for a period of two years making the total length of the scheme three years.

The intention of the scheme is on paper good with the idea being to inculcate savings and investments in equity and equity linked schemes. The paperwork involved and the kind of effort one would have to go through may make the same difficult to operate. With just one mutual fund offering an eligible scheme under CNX100 currently one would see a large number of fund houses offering schemes on these indices. Mutual funds would have to take the initiative in launching products and also extensively marketing the same to attract first time investors.

There was till last year a product known as infra bonds where the principle invested was tax deductible under section 80CCF. This instrument allowed deduction of tax on the principle upto Rs 20,000 and was in existence for two years. The scheme did not do well as people found the value of Rs 20,000 to less and there were talks of increasing the value to Rs 50,000 to make it economical to operate. Institutions who launched these schemes felt that it was difficult to service investors and the cost of operation and servicing clients was expensive. The RGESS is a onetime scheme for investors and benefit can be taken only once in a lifetime. One hopes that the fate of the scheme does not land up eventually like 80CCF infra bonds.

Secondly there is a concept being floated around in the Ministry of Divestment about an ETF which would help divestment and that such an ETF would trade at a premium to its NAV. One only hopes that inclusion of ETF for the RGESS is not as a fall out of this thought which seems flawed. Globally ETF’s track the NAV and trade at a discount to the underlying and to expect that logic in India would change at the stock market would be unpalatable.

Good thought, operationally difficult to manage but provides ample opportunity to mutual funds to step in and educate first time investors and potential target audience for the RGESS scheme.

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