Action taken by SEBI :: Business Line,

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In the order issued in December, SEBI had restrained all the seven companies and their directors from raising equity and buying and selling shares in the market. It had also barred three investment bankers, Almondz Global Securities, Atherstone Capital and PNB Investment Services from taking on any fresh merchant banking assignments. Onelife Capital, whose core business is investment banking and portfolio management, was told to stop these activities since it can endanger investor interest.

The action against the investment bankers is likely to be the most effective among these strictures.  Fear of losing their reputation and their licence will deter investment bankers from colluding with promoters in suppressing material information or even from taking on issues where promoters have dubious credentials.

CIRCUIT BANDS

The actions taken by SEBI subsequent to the order show that the regulator is giving some serious thought to remove the ills plaguing primary markets. It has now given the green signal to imposing circuit bands on the listing day and the period immediately after. This will effectively throttle the listing gain racket that had converted the primary market into a casino.

Call auction for an hour on the listing day is also proposed so that price discovery is smoother. What the call auction does is to bunch up the buy and sell bids according to the quoted price and then the bids are matched. The price at which the maximum number of stocks is traded is called the equilibrium price. This is the price at which the stock begins trading.

After the completion of the call auction, a circuit band of 5 per cent is to be applied for issues less than Rs 250 crore. The circuit band for issues over this limit is 20 per cent. The smaller issues will also trade in the trade for trade segment for 10 days after listing. Transactions in this segment are against delivery only and cannot be squared at the end of the day. This will bring to an end circular trading done by some entities to jack up price after listing.

LEAD MANAGERS BEWARE

Another important rule that SEBI has imposed in January this year is to ask merchant bankers to disclose their track record. The performance of the public offers managed by them over the past three years is to be listed on their web site and a link provided in the offer document. This is yet another way in which the regulator is ensuring that the merchant bankers carry out their duties diligently.

IS IT ENOUGH?

The International Advisory Board (IAB) of SEBI that met recently had two interesting suggestions for primary markets.

First it advised that issues should have a green shoe option attached. This is a method of price stabilisation used in other countries. In the US, underwriters to the issue oversell or sell more than the offer size with the intention to buy the oversold portion back, should the price fall after listing. If the stock price rose after listing, underwriters would have the option to take from the company the required number of shares at offer price so that they do not incur loss. This helps in preventing price from crashing or rising too sharply after listing.

The other suggestion of the IAB was to have an independent research company tracking the stock for a few years after listing and coming out with regular updates. 

Punishment meted out to errant promoters and directors also needs to be sterner to discourage others from replicating these acts. Charging a hefty fine or even imprisonment would be a better idea than a mild bar from transacting in the equity market.

In many of the companies, investigations have revealed that the management might not be able to deliver on the promise made in the offer document. Complaints of investors who have invested based on the false statements made in the prospectus need to be redressed by asking the company to return the money to investors.