Two recent moves by the capital market regulator to enhance the quality of investor protection, though well intentioned, are likely to be counterproductive in practice. Earlier this month, SEBI issued a formal order laying down broad criteria for rejecting the draft offer documents filed by prospective issuers of securities. Last month, through a discussion paper, SEBI revived an old idea of introducing a mandatory safety net mechanism for specified securities in public issues. Both these seek to enhance the quality of the primary market, the first one by screening the draft prospectuses to weed out undesirable or ineligible public offers and the second, by ushering in a support price mechanism in the post issue period. The task of laying down standards for draft offer documents has obviously not been easy. Inevitably, the regulator has only been able to prescribe broad yardsticks which have ended up being too vague. For instance, one of the grounds for rejection is when SEBI has reasonable grounds to believe that the draft offer document is deficient from the point of view of adequacy and quality of disclosures. Those are areas where subjective judgements by the regulator might smack of misuse of its discretionary powers. Moreover, unless the promoters brazenly violate guidelines in areas such as deliberately fudging the objects of the issue, or the sources of their initial capital contribution, it will be beyond the regulator to spot malfeasance and reject the offer document.
An even more general argument against both the recent SEBI initiatives arises out of the fact that primary market investments, as much as those in the secondary market, involve risk taking by investors. It is the duty of the regulator to prescribe reasonable safeguards and disclosures of risks. But it is an entirely different matter for capital market regulators to try and ensure total safety of equity investments, even assuming they have the wherewithal. The proposal to introduce a safety net for small investors long after the shares are listed will be another example of regulatory overreach. Since the issuers of securities will have to buy a fixed quantity of shares at the issue price if their market quotation falls below certain benchmarks, the expenses of the issue will further mount and be a serious disincentive to fund raising. Besides, the proposal erroneously assumes that all initial public offers, after they are listed, will follow the same price patterns in sync with identified stock market indices. The regulator is not helping the new issue market and its participants with these two proposals.