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SEBI moves welcome
November, 11th 2009

Markets regulator SEBI has decided to allow companies to auction their shares in a follow-on public offer (FPO) to qualified institutional buyers at differential prices above the floor, while retail investors will get shares at the floor price.

This is welcome, to the extent it is a precursor to allowing such auctions to discover price in an initial public offer (IPO). After all, for a listed company, there already is a market price whose sanctity is called into question by any other price discovery mechanism.

In an IPO, such an auction would prove an efficient way to allocate shares and get the issuer the best average price for its offering and also do away with the mess of over-subscriptions.

The trigger for the present guidelines would appear to be the government's need to get the best possible price for its proposed disinvestment in a number of listed companies. The SEBI decision also brings some order to the discount companies can offer to employees.

The regulator's move to create a separate trading platform for small and medium enterprises (SMEs) and relax some eligibility norms to help them list is also welcome, as it will help them raise risk capital cheaper than from private equity.

However, a minimum IPO application size of Rs 1 lakh and a minimum trading lot of the same size for SMEs make little sense. Had such restrictions been in place, would Infosys have been able to get its IPO through? And would that company have turned millionaires out of so many small investors who had the sense to invest in its initial offering?

True, small investors might lose their money, making uninformed choices on SMEs. But to protect them against their own poor sense, SEBI is also depriving them of the opportunity to make profitable investments in SMEs on which they have done diligent research.

Small investors have the right to make big money from small investments in small companies. SEBI should not deprive them of that right. Even if that right comes paired with the right to lose their money on unwise bets on the stock market.

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