RELIEF RALLY Sebi Plans Safety Net for IPO Investors

Promoters or lead bankers will have to compensate investors ifshare price falls over 20% of the issue price within three months of listing Retail investors in an initial share sale will have to be compensated if the shares fall sharply within three months of listing, capital market regulator Sebi proposed on Friday.  According to the proposal, the so-called safety net provision will trigger in cases where the price of the shares fall by more than 20% from the issue price. Promoters will also have to compensate investors if the volume-weighted average market price of the shares drop 20% more than the benchmark indices – BSE 500 or S&P CNX 500 – within three months of listing. The regulator's proposal comes after an internal analysis of the recent post-listing price performance of initial public offerings. According to the analysis, of the 117 share sales in four years to 2011, as many as 72 were trading below the issue price after six months of listing. Out of these 72 scrips, the fall was more than 20% of the Issue price for 55 scrips, Sebi said. "If this trend continues, the sentiment of the investors will get affected and they may lose confidence in the capital market. Thus, there is a need to provide a safety net arrangement for retail investors to build their confidence in the capital market," the regulator said in a discussion paper posted on its website inviting comments before October 31.  Sebi also said the facility will be available for all the allotted securities to retail investors applying for shares worth less than . 50,000. The promoters or lead banker for the share sale will have to announce triggering of the safety net mechanism after three months of the share sale.  Promoters will have to buy back shares from retail investors who tender the shares back and pay them within 20 days. Total obligation on issuer for the retail investor will be capped at 5% of the issue size. After a Sebi board meet last month, it was suggested that besides disclosures, more measures were needed to bring in "self-discipline" in pricing of initial share sales.  The board decided that while a safety net mechanism was needed to protect the interests of small investors, public consultation on the details was needed before the implementation of the guidelines.