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onventional wisdom would have one believe that investing in primary equity offerings or IPOs makes more sense than buying shares from the secondary market. Subscribing to fresh shares issued directly by companies is considered cheaper than purchasing them after they are listed on the bourses, where they would typically trade at a premium over the issue price. But as a recent Business Line analysis shows, investors in IPOs during 2006 to 2011 have consistently made less money, or lost much more than if had they put the same sums in Nifty stocks. That says a lot about the quality of many IPOs, if not the dubious credentials of their promoters. Either way, it discourages already wary ordinary investors from subscribing to primary issues, with obvious implications for corporate resource-raising. It is only now that the Securities and Exchange Board of India (SEBI), having remained a passive observer for long, has finally woken up to address the much-needed clean-up of primary markets.

The market regulator, late last month, came out with orders against seven companies and associated merchant bankers involved in making false disclosures in offer documents, siphoning of IPO proceeds, and price manipulation on the listing day. Orders of such a nature, issued for the first time, at least send the right signals to investors, though the punishment meted out here – barring companies from future equity fund raisings or asking the promoters/directors not to transact in the market – may not amount to much. SEBI's investigations have revealed some of the companies to have fabricated their client and vendor lists, with their core businesses itself being fictitious. Why should their shares then even be allowed to trade on the exchanges? The promoter for one IPO was found to be associated with another company that had previously made a public offering and disappeared without a trace. Such mild punishments are only an invitation for these worthies to re-surface in future with another name, as they often end up doing.

While SEBI's orders are a good beginning, they need to go much further to dissuade company promoters as well as investment bankers from undertaking fraudulent IPO assignments. The least that can be done is to charge the promoters concerned hefty fines or even launch criminal prosecutions. Since the companies have mobilised funds based on false and misleading disclosures, they should be made to disgorge the IPO proceeds. Allowing normal trading in these shares is fraught with risk, as lay investors unaware of SEBI's orders may still be buying and selling them. These stocks need to be moved to a separate category with higher trading margins that would ward off small investors. And finally, SEBI could perhaps take a leaf from the Comptroller and Auditor General of India's book to go after the big fish. The firms against whom orders have now been passed are small fries by comparison.

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