The Securities and Exchange Board of India (SEBI) is at it again. One wonders why it is persisting with superficial reforms of the primary market for shares, when there is a crying need for reforms of the roots and branches variety.

In 2007, it made rating of IPOs on a scale of 1 to 5 mandatory. Indeed, the move was historic, given that no other country had done this. Rating has invariably been associated with debt instruments. Small wonder, there was applause for the SEBI's pioneering efforts, though those in the know were quick to point out the futility of rating equity sans the issue price, as it was like a real estate consultant saying the property was good, without daring to offer his advice on the price demanded.

Be that as it may, this time round it is the mandate to merchant bankers — spelt out in circular dated January 10, 2012 issued with a view to protecting investors —to the effect that they should post on their websites the three-year track record of companies whose IPOs/FPOs were managed by them in the prescribed format.

VALUE OF DISCLOSURES

Some of the disclosures required to be made by the merchant bankers in their websites regarding each issue managed by them are: Issue size, extent of over/under subscription, the shareholding of the QIBs at the end of the first quarter post-listing and at the end of each of the three subsequent financial years (to show whether they exited quickly after making listing gains), financials of the company for three years, earning per share and price-earning multiple at the end of each of the three financial years post-listing vis-à-vis the peer as well as the industry average and whether the shares are thinly or actively traded.

The offer document should alert investors to the existence of such information on the merchant banker's website so that s/he could see whether it has had the proverbial Midas touch.

The track record of companies managed by the same merchant banker is neither here nor there as far as facilitation of informed decision making is concerned. Probably, mandating information regarding another company belonging to the same sector could have made sense.

The SEBI mandate would have the effect of information overload, if the reader is unable to sift grain from chaff. In any case, there is no guarantee that if the shares of a company belonging to the same sector have had a dream run in the bourses, the issue on offer would also meet with the same fate. In the event, this additional disclosure regime can at best vouchsafe the merchant banker's Midas touch or its lack.

MANDATORY SAFETY NET

The primary reason for the primary market's sustained moribund status is not lack of information, but the promoters' greed in asking for a hefty premium despite the so-called independent price discovery by the Qualified Institutional Buyers (QIBs).

That companies without facilities in place, leave alone profits, are allowed to make public issues and that too at unconscionable premiums is a sad commentary on the law and regulatory oversight of IPOs in the country.

Hundred per cent book-building by QIBs is no guarantee to the retail investors as to the correctness of the price discovered, as evidenced by a spate of issues in the past where listing losses stared the investors in the face and the shares continued to languish on the bourses.

Quite a few promoters have taken advantage of this state of affairs to unload their holdings at the same unconscionable premium by combining IPO with offer of sale.

The gullible public cannot distinguish between IPO and offer of sale but that is not the main point. The point is the SEBI ought to rein in greed, which is possible only when it hits where it hurts.

Merchant bankers and promoters must be called upon to unfurl a mandatory safety net mechanism under which they would have to buy out retail investors, should the market price dip below the offer price when the scheme is in operation.

Right now, the scheme is optional and obviously there are no takers for it, because voluntary compliance with a public interest scheme is not in human nature, by and large. The SEBI should either make this regime mandatory, or call upon companies to pay a minimum dividend on shares, including the premium portion.

As it is, dividend is optional and paid only on the face value, thus rendering the return on investment low.

A minimum dividend, say of 4 per cent, would be the user charges the investors richly and justly deserve. It will have a sobering and chastening effect on the vaulting ambitions of companies in charging hefty premiums that makes equity the cheapest source of finance, one that is neither repayable nor subject to user charges.

The SEBI has for long pursued the mirage of ensuring investors' safety through disclosures. It should be reminded that nothing short of financial imposts can tame the rapacity of corporates.

Faced with the grim prospect of having to pay minimum dividend, companies would not blithely go for hefty premiums but instead settle for a modest equity capital with even more modest share premium account. Right now, share premium account of many companies is at a shocking multiple of the equity capital.

(The author is a New Delhi-based chartered accountant.)

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