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Monday, January 28, 2013

How about investing in IPOs for 3 months? With zero downside, the lure of speculating in primary market is set to get irresistible. But is that what market regulator Securities and Exchange Board of India (SEBI) is looking for? It seems the regulator is taking rather harmful steps in its attempt to lure investors to primary markets. The so called solution of 'safety net' makes things no less risky for retail investors.

Now it is true that over 60% of the IPO issuances between 2008 and 2011 performed badly. In many cases it was due to steep pricing of the issue. In others it was due to disappointing fundamental performance of the listed companies. But since investing is about buying fundamentally sound businesses at reasonable valuations, the concept of 'buying back shares in the event of a fall' is meaningless. It defeats the very principle of price discovery. Hence SEBI's proposal that issuers should compulsorily offer safety net to IPO investors seems ridiculous. That too if the share price falls more than 20% of the issue price within 3 months of listing! We believe market speculators will hardly miss an opportunity to speculate on such IPOs. If promoters fail to compensate investors in the event of heightened volatility, confidence of retail investors in capital markets will be quashed for good. Instead of making such absurd promises, we believe that the SEBI could do with some initiatives to ensure better corporate governance amongst companies.

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