The Indian market regulator has intervened in the normal functioning of markets once too often. Its latest wheeze is nothing short of crazy.
You couldn’t make it up. In its wisdom, the Securities and Exchange Board of India believes one way to make the country’s equity market safer for retail investors is to give them refunds if the shares fall below the issue price after six months.
Any company wanting to list on one of India’s exchanges will have to set aside the money from retail shareholders in a separate account in case they ask for their money back after the 180 day period.
And there’s no escape, as offering a retail tranche is mandatory in India. The first company to be a victim of this — and let’s be clear, this is going to hurt issuers — is search engine Just Dial, which could face the prospect of missing out on 10% of its the proceeds of its proposed $174m IPO which are set aside for retail.
Sebi is acting with the best of intentions. Accusations of stock manipulation have been frequent in the past, with many IPOs plummeting on their first day’s trading. This was put down to the so-called pump and dump technique of artificially inflating prices only to sell them at the higher price.
But the regulator already moved to tackle this in February by making it more expensive for investors to trade shares in the first 10 days after a listing.
The hazards of refunds outweigh any benefits. Six months is a long time in markets and over that time falls in shares prices could be linked to wider macro economic factors rather than share manipulation. What Sebi’s move does is reverse one of the basic tenets of investing — that you might lose your money. If retail investors are protected from all losses, even legitimate ones, this can only change investment behaviour for the worse — not something that is helpful to any stock market.
Moreover, at a time when Indian companies are raising less from equities than they have done historically (Indian IPOs generated just $1.3bn in 2012, down from $1.6bn in 2011 and $10.7bn in 2010, according to Dealogic) and much less than fellow Brics Brazil, China and Russia, India is in danger of scaring away larger names that might be considering and IPO.
Smaller companies will have less choice about where they list, but at a time when exchanges around the world are aggressively vying to win new business, the last thing the country wants is more of its corporate champions going overseas.
Sebi is right to want to protect the man on the street from practices that make him a victim. But retail investors should still have to bear the same legitimate risks as any other shareholder. Market manipulation doesn’t get any better just because it is the regulator doing it.