Coffee Day listing loss: Mandatory safety net for investors brooks no delay

The recent IPO of Coffee Day has not been able to break the jinx – listing losses i.e. the scrip being traded in the bourses at a discount to the IPO price. Coffee Day IPO price was Rs 328 but it had takers at only Rs 313 which is quite ominous for the retail investors.[caption id=“attachment_2126303” align=“alignleft” width=“380”]  Weak debut on bourses. Image courtesy CCD website[/caption] The years 2011 and 2012 marked a new low in so far as IPOs in India were concerned what with 80 percent of the issues condemned to a listing loss. Ever since, the market regulator has been making some noises, some right, some wrong, but has for curious reasons not walked the talk. Its initial reaction was to make unfurling of safety net mandatory. As it is, it is voluntary – a company promoter may buy out retail investors upto 1,000 shares per investor by paying the IPO offer price where the market quotation dips below such offer price during the first six months following listing. One wonders why the Sebi is coy about walking the talk and instead going off at a tangent in 2014 to strengthen the green shoe mechanism instead. The extant Sebi Green shoe mechanism allows a company to allow 15 percent over-subscription by a stabilizing agent to whom an existing dominant shareholder, usually one of the promoters, would also handover a matching number of shares. The stabilizing agent would intervene in the first 30 days of listing – if the prices shoot way above the IPO price, he would douse the fire by offloading the shares in his possession and if the quotations remain depressed during this period, he would buy up shares with the help of over-subscription proceeds to lift the quotation. This is tokenism at best given the extremely short duration for which the stabilizing operation is carried out. Even if it is operated for a longer period, it won’t be as efficacious a remedy as mandatory safety net. Indeed mandatory safety net brooks no delay in a country where voluntary measures seldom bear fruits. Mandatory safety net is what the doctor has ordered. The Sebi knows this but is somehow dilly-dallying. The issue price is determined by the company in league with merchant bankers and QIBs or anchor investors who participate in the book building exercise. The poor retail investors willy-nilly follow the deep-pocketed QIBs pied-piper like and soon burn their fingers when listing losses stare at them. Those who lead the retail investors up the garden path must be made a price. The Sebi should therefore forthwith turn the extant safety net regulation on its head – mandatory from voluntary – with a vital additional change. Promoters alone are not the culprits – QIBs and merchant bankers should also share blame. All of them must be made to buy out retail investors at the IPO price upto 1,000 shares each should the markets dip below the offer price during the first six months. Their liability must be proportionate. That would have a sobering effect – think before bidding for a rash price. A person thinks twice if he knows the unpleasant consequences of his over exuberance – stewing in his own juice by in this instance having to reimburse the exaggerated price to the hapless retail investors. The heady and undeserving premium charged from newcomers would come down sharply in its wake. Mandatory safety net would be vastly superior to green shoe operation because while the former would directly ameliorate the plight of retail investors, the latter would condemn them to deal with the market forces. It is as bad and unjust as a company asking its investors to collect their rewards from the market by way of capital appreciation instead of rewarding them upfront with cash dividend democratically when it has the requisite cash. Sebi should not be persuaded by the argument proffered by market fundamentalists that equity investors ought to have known at the time of investing the risky nature of their investments as their counter for not making safety net mandatory. That would not only be cruel but also indulging the cupidity of company promoters and recklessness of anchor investors.