Given the likely shortfall in taxes and excess expenditure—Vijay Kelkar puts the two at a full percentage point of GDP in FY13—the government’s best bet to come near the fiscal deficit target is to have a buoyant capital market ease the prospects of greater disinvestment. Which is why it has the Rajiv Gandhi Equity Savings Scheme (RGESS) for first-time equity investors, and now Sebi has come up with a discussion paper on whether promoters should compensate retail investors (those that apply for under R50,000) if the price of an IPO falls more than 20% of the issue price within three months. Given that 56 of 117 IPOs between 2008 and 2011 saw prices fall more than a fifth within 6 months of listing, Sebi wants promoters to make good the fall up to 3 months of the IPO, subject to a cap of 5% of the size of the IPO. The fall is to measured in relative terms—if an IPO stock falls 22% while the Sensex is steady, a compensation will have to be paid; if the Sensex falls 3%, however, the IPO would have fallen 19% and so no compensation is to be paid.
On the surface that sounds fair since, often enough, promoters don’t make enough disclosures and merchant bankers don’t do enough due diligence on the companies they’re selling to investors. The problem with the proposal is that stock markets, more so IPOs, are inherently risky and so retail investors—who examine tomatoes more closely than they do IPO documents before buying—would do better to buy stocks through mutual funds who have the capacity to do deeper analysis and take bigger risks. If there is evidence of promoters/merchant banks cooking the books or not disclosing adequate risk to investors, penalise them for this – for now, Sebi’s decision to get merchant bankers to make public their track record seems good enough. Penalising promoters for not getting an idea right in the first three months—that’s why shares tank—is another way of ensuring promoters don’t expand their business. If Mark Zuckerberg knew he may have to shell out $5 billion (5% of issue size) if Facebook’s share fell—Facebook’s share price halved within 3 months—would he ever have listed? And while on the subject of keeping risk within bounds, why not ask small investors to pass on their upside to promoters if the share rises more than 20%? After all, the idea seems to be to make investing in stock markets equivalent to investing in a fixed deposit.