Sebi plans extensive reforms of IPO, MF rules

Safety Net

Market regulator Securities and Exchange Board of India (Sebi) will consider this week wide-ranging reforms in its regulations for mutual funds and initial public offers (IPOs), including a 'safety net' guarantee and tax incentives for new investors.

According to a senior official, the key proposals for reforms in primary market include introduction of a 'safety net' guarantee for the investors buying shares through IPOs.

As per the proposed mechanism, a certain portion of the investment made by retail shareholders in the IPOs could be guaranteed for a fixed period, which could of six months, even if the shares' value plunge below the IPO allotment price during this time.

This 'safety net' mechanism is being considered only for the small retail investors, who would be compensated by the promoters and other entities selling shares through IPOs in the event of the company's shares plunging below a certain threshold limit within six months of listing or the time frame set by Sebi, sources said.

As per the current regulations, the companies are allowed to provide such 'safety nets' during their IPOs, but it is not mandatory for them to make such provisions and only a few companies have provided such facility for investors in the past.

Sebi is of the opinion that a mandatory 'safety net' provision would also help in fair pricing of IPOs, besides providing investors some sort of capital protection guarantee.

Many companies and investment bankers have come under the criticism of over-pricing of IPOs after their shares fell below the public offer price levels in several cases.

Sources said the companies could be allowed to pass on the costs of 'safety net' provision to the investment bankers, who are primarily responsible for fixing the price of shares to be sold through IPOs.

At the upcoming board meet, Sebi is also likely to discuss a new definition for 'small or retail investors' as there are some ambiguity in current regulations.

For IPOs, the investors putting in up to Rs two lakh are considered retail investors, while already listed companies distinguish small and large individual shareholders as those holding shares worth up to Rs 1 lakh and those holding shares worth more than Rs 1 lakh, respectively.

e-IPO

Various proposals expected to be discussed and approved at the upcoming board meeting of Sebi on 16 August also include introduction of e-IPO, which would allow investors to bid for IPO shares electronically and without any physical paperwork.

For mutual funds, the regulator will consider giving the fund houses flexibility in using their expense ratio. At present, the fund houses are required to divide their expense ratio (an amount deduced from investors' funds) as per a fixed formula between the fund management fees and other expenses.

There have been demands from some section of the mutual fund industry to allow levying an additional charge of 2 per cent from investors. However, the demand has faced opposition from within the industry and was being seen as return of the controversial entry-load (a charge levied on new investors), which was scrapped by Sebi in 2009.

The introduction of any fresh charge could be seen as an anti-investor move and therefore Sebi is not very comfortable with any such idea, the official said, while adding that there could be certain tax incentives to attract investors to mutual funds, while measures would be discussed to help the mutual fund distributors as well.

In his first Press conference after taking over as the country's new finance minister, P Chidambaram had also said last Monday that a number of decisions would be taken soon to encourage more people to invest in mutual funds, insurance polices and other instruments.

A major tax incentive proposal relates to the stock investments as well, as Sebi would consider finalising the fine prints of Rajiv Gandhi Equity Scheme, which was announced in this year's Union Budget and provides for tax benfits to first time investors in the stock market.

Besides, Sebi is also considering changes in the profitability eligibility criteria for companies allowed to come out with IPOs, while some changes could be made in FPOs (Follow-on Public Offer) and other methods of share sale by already listed companies.