The Hindu Business Line : Throwback to control era

QUITE A FEW recent SEBI recommendations for primary market regulation are reminiscent of the stifling control raj of the erstwhile Controller of Capital Issues. Short of advocating a formula for setting prices of initial public offers, the latest SEBI recommendations — including norms on net tangible assets, their composition, the net worth, the issue size limits, and the appraisal/financing by banks/financial institutions for IPOs that do not go through the book-building route — are bound to fetter capital market activity. No doubt a free-for-all cannot be allowed, but the regulatory framework must be of prudent checks and balances rather than of controls. In the last five years, a combination of regulatory checks and balances, tighter listing norms and scrutiny by the NSE/BSE, use of the book-building route and increased investor awareness of fly-by-night operators have well filtered the IPOs hitting the market. Only reasonably priced IPOs have found investor support. In this backdrop, the enthusiasm of the SEBI Advisory Committee on Primary Markets to introduce more restrictions appears misplaced.

The plan to move away from profitability to net tangible assets as the base criterion does not appear appropriate. A combination of profitability, dividend payments and cash flows ought to be the focus areas for investors. SEBI may be better off highlighting key aspects that investors should look at rather than introducing new filters whose financial impact may neither register with all retail investors nor be of any great significance. SEBI's endeavour should be to further improve the quality of disclosure rather than stifle the IPO market in a bid to escape criticism. The restriction placed on the size of the issue (at five times the pre-issue net worth) appears particularly unwarranted as it could hamper plans of companies with genuine business growth plans. Similarly, the requirement of financing/appraisal by banks and financial institutions for IPOs not taking the book-building route appears meaningless. The market has proved a better filter of dubious companies than banks and financial institutions whose vested interest often pushes itself ahead of the `larger than life' role SEBI visualises for these entities. Instances abound of appraising/financing banks and institutions dishing out fancy projections of project cost and profitability. For SEBI to now take refuge in such ideas appears unnecessary.

The proposal to reduce the minimum amount for qualified institutional bidders (QIBs) in a book building IPO to 40 per cent is unwarranted dilution. This is ostensibly to facilitate greater retail participation in IPOs. Since most book-building IPOs come at stiff prices, enhanced QIB interest has helped the overall market rather than the other way around. In any case, in most companies, retail interest is confined to around 20 per cent of equity, with institutional investors calling the shots. It is doubtful if the additional leeway would actually lead to greater retail participation. Rather than constantly tinker with the regulations on the plea of investor protection, SEBI would do well to simplify its primary market framework and impart a degree of stability. That would serve the interests of issuers of capital and investors better than sneaking in more restrictions.

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