Sucheta Dalal :SEBI has initiated new investor-friendly moves which for the first time corrects depository related issues
Sucheta Dalal

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SEBI has initiated new investor-friendly moves, which for the first time corrects depository related issues  

November 12, 2012

Few positive actions have been taken by the Sebi on IPOs and depositories, to make them more investor friendly

Sucheta Dalal

Investor Protection: Positive actions on the IPO front

Market intermediaries have ridiculed two proposed actions by the Securities and Exchange Board of India (SEBI) which seem to find favour with retail investors. The first is to revive the tried and failed experiment with a ‘safety-net’ for retail investors in initial public offerings (IPOs); the second allows SEBI to reject draft offer documents based on broad criteria outlined in a formal order. Both these steps are seemingly regressive. But they are in line with behavioural research which suggests that human minds are not hardwired to understand the complexity of financial products. This means that disclosure-based regulatory regimes, which expect investors to be fully responsible for what they are buying (no matter what companies and intermediaries concoct and wrap in dense legalese) simply won’t work. Equity investment is, indeed, associated with high risk, but that does not mean it should be a blind bet. It requires comprehensive risk assessment based on disclosures by companies, certified for accuracy by investment bankers and a prospectus that is scrutinised by the regulator. None of these measures, or IPOs ratings, help investors in assessing the issue price.

Companies, egged on by their investment bankers, were always greedy and wanted shares placed at the highest price. “Leaving something on the table for investors” after listing, was just a theory that was never practised. Institutional investors, who ought to have objected to the pricing, were happy to play along for their own reasons.

Consequently, investors were stuck with shares purchased at the highest possible price and it was always downhill after listing. Similarly, companies that fudged facts or made dodgy disclosures were able to tap investors for funds and there was little that the regulator could do. SEBI has occasionally found ways to delay IPO plans of truly dubious companies by raising innumerable queries or using investor complaints as an excuse. Instead of this backdoor route that can be misused, it is by far better that the market watchdog be adequately empowered to block the entry of crooked companies and prevent them from picking investors’ pockets. The power to reject draft prospectuses will require SEBI officials to make bold and subjective decisions, but since they will be open and transparent, it will ensure that the power is not misused. We need to remember that investors have quit the capital market by the millions. Our investor population is down from a claimed 20 million in 1992 to just around 9 or 10 million according to SEBI’s recent survey. This is the time to experiment with radical measures to build investor confidence. In fact, we, at Moneylife, have been telling readers to avoid IPOs altogether, unless the IPO is made during a bear market. If the stock is worth buying, it will always be available cheaper after listing, given the high IPO pricing. We need to see if SEBI’s actions force companies to price issues correctly and persuade us to change our stand. Steps to prevent price manipulation on listing day and the proposal to ensure minimal retail allotments are both good for investors.

Stock Depository Rules: Making them investor-friendly

Some 16 years after the first depository came into existence and India began to move towards paperless trading, SEBI has dictated the first few changes in depository procedures. Until now, most changes in fees or policies were decided by the NSDL (National Securities Depository Limited) and many complaints were simply ignored. Now, for the first time (after NSDL’s founder managing director, who also steered the Depository Act while at SEBI, is no longer associated with the capital market), SEBI plans to empower depositories to initiate penal action against companies that do not reconcile their demat and physical shares and expose the equity market and investors to possible frauds.

The decision, while positive, is also shocking. It means that even after the DSQ Software case of 2001, which led to strictures against NSDL by the Mohan Gopal-Leeladhar committee, no action had been taken for 10 years to prevent such fraud. It may be recalled that Dinesh Dalmia, the founder of DSQ Software had effected a 50% increase in the company’s capital without informing the bourses or seeking shareholder approval. Instead, he quietly got the shares dematerialised and delivered them to the Kolkata-based brokers who had helped manipulate the stock.

This order was suppressed by SEBI during chairman CB Bhave’s tenure and was finally made public after a court order. According to a media report, the two national bourses, NSE and BSE have reported discrepancies in share capital reconciliation in a shocking 329 and 695 companies, respectively, for the quarter ending March 2012.

Has this fact been hidden from the SEBI board for 16 years? Why wasn’t such an amendment moved earlier? Clearly, when it comes to depositories and their operations, there are plenty of unasked and unanswered questions. The good news is that SEBI is now ready to seek an amendment to the Depository Act to ensure action and accountability. In another good move, SEBI has ordered relaxation rules and procedures with regard to a change in name of individual beneficial owner accounts, either through gazette notification or marriage. Depositories have been asked to amend their rules to implement the changes within three months and also ensure that there is an audit trail of the change.

-- Sucheta Dalal