In a bid to protect the interests of retail investors, market regulator SEBI has framed draft norms for mandatory safety net mechanism in IPOs. According to SEBI, the safety net mechanism would be available for all securities allotted to original resident retail individual allottees that had made an application for up to Rs. 50,000. And the total obligation for such provision is capped at five to ten per cent of the issue size.

This Safety Net is now mandatory for all the IPOs hence forth and will be triggered in cases where the price of the shares has depreciated by more than 20 per cent from the issue price. The price for this provision shall be calculated as the volume-weighted average market price of such shares. Safety Net shall be effective for six months from the date of trigger.

Further, the 20 per cent depreciation in share price would be considered over and above the general fall, if any, in market index. The market index for this purpose may be BSE-500 or S&P CNX 500 and the index to be considered for this purpose should be disclosed in the offer document.

According to SEBI, besides disclosures, other measures are needed to bring in self-discipline in IPO pricing and one of the steps to protect the interests of small investors is a safety net mechanism. However, there is already a voluntary safety net mechanism in place for IPO investors.

It will be certainly one of its kinds where SEBI is trying to streamline the unregulated price of a stock for not a day or two but for 6 months. This goes against any basics of equity market investing. Investing for a fixed 6 months time period is not going to make anything better for equity markets. People will come in and dump the stocks in six months again never becoming a long term investor. But the watchdog is definitely misses the finer points on IPO pricing and the stringent guidelines for merchant bankers that are the deciding authority.