Convertible option in the works to shield IPO investors
Oct 28 2013 , Mumbai
Speaking to journalists on the sidelines of an investor protection conference, Sebi chairman UK Sinha said the proposal was being discussed, as there was stiff opposition to another proposal of ‘mandatory safety net mechanism’ in IPOs. Sinha said the primary market advisory committee (PMAC) of Sebi was now debating an alternative route to allow companies to issue convertibles, which allowed investors the option of converting to shares after a certain period. The Sebi chairman did not elaborate.
The convertible option, according to market analysts, may be designed to give a fixed coupon rate on the instrument, which will offer a built-in flexibility to convert into shares after three or six months.
“This would mean, small investors would have the confidence to invest in such issues as they would know that their capital would be protected, come what may. Further, if there is a significant premium they would convert the instrument into shares,” a broker explained.
Under the ‘safety net’ proposal that Sebi had floated in September 2012, the issuer was required to purchase up to a maximum of 1,000 shares from original resident retail investors within six months of an IPO, if the shares traded at a discount of 20 per cent.
Industry officials said investment bankers and companies opposed the mechanism, which the securities regulator had proposed through a discussion paper last September, saying such ‘insurance schemes’ were not feasible in the current market condition.
“The proposed safety net mechanism for investors has generated strong opposition from various stakeholders. Sebi will consider these views thoroughly,” Sinha said.
“People are saying equities are risk instruments, so why provide safety. But our current regulations do provide for voluntary safety net,” PTI quoted the Sebi chief as saying.
Sinha’s comment comes at a time when the IPO market has nearly run dry. This year has seen just three IPOs so far, viz. Just Dial, Repco Home Finance and V-Mart. Several companies have been forced to postpone their initial share sales due to low investor sentiment. Two IPOs – Sai Silks and Scotts Garments – pulled out their offerings, as they failed to generate enough interest.
In its discussion paper on ‘mandatory safety net mechanism’, Sebi said it analysed price performance of the stocks listed between 2008 to 2011. It was observed that out of 117 stocks, 72 (62 per cent) were trading below their issue prices after six months of their listing.
Out of those 72 stocks, which witnessed a fall in prices, the fall was more than 20 per cent of the issue price in case 55 issues. “If this trend continues, the sentiment of investors would be affected and they may lose confidence in the capital market,” Sebi had