Capital markets regulator, Securities and Exchange Board of India (SEBI), will implement the new initial public offering (IPO) process by end-August. And to ensure the process works smoothly, the old process will continue simultaneously in the first stage of its execution as a pilot project.
Under the proposed norms, the money an investor pays while applying for an IPO will remain in his bank and earn interest till the allotment is made. Earlier, the application money had to be transferred to a depository — National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL) — and the interest the money earned did not reach the investor.
“The process will run parallel to the old process as a pilot project for some time,” said CB Bhave, chairman, SEBI. “We really don’t know how the system works. We need to get used to it. We have to sort out glitches if there are any in the beginning. The final implementation will depend on the pilot project after which it will be decided to make it mandatory or keep it optional.”
This new mode of payment where the application amount is blocked in the bank account will apply to public issues offered under the book building route. Only those retail investors who bid at the cut-off price as the single option and agree not to revise their bids will be eligible for the same. The new system aims to eliminate the process of giving refunds by companies to the applicants in case of non-allotment of shares.
Addressing the Financial Planning Congress 2008, in New Delhi on Tuesday, Bhave urged financial services providers to give prominence to investors and not regulators. The formation of self regulatory organisations (SRO), he said, needs to be looked at in this light. “Sebi is looking to encourage self regulation and is looking forward to creating SROs,” he said. “But as an SRO your first target is not to convince SEBI but to carry out your conviction with investors.”
The need for an SRO for distributors comes because of mis-selling and commissions-led advisory, a malpractice that has become common at the point of sale. Advisors and sellers of financial products like mutual funds and insurance, Bhave said, need to move away from their incentive structure to the need of the investor.
“Transparency is needed, under which advisors will have to disclose the incentive structure of the advisory,” he said. This is a practice followed in many developed countries like Australia and New Zealand and needs to be imported into the Indian regulatory space.