A recent issue of The Financial Express (08-11-2011) reported that SEBI is about to constitute a committee to review various aspects relating to improvement of the Primary market for stocks in the country. The major issues of concern are (a) bringing back the retail investors to the primary market; (b) reduction of issue costs, which currently amount to as high as 10%; and (c) reduction of the time gap between closure of issue and listing to 3 days from the current 12 days.
From my experience of participating in the primary market (though in a limited manner) for the last 10 years, I feel the confidence levels of retail (small) investors is now at the rock bottom. The increased volatility in the market and the poor performance of many IPOs listed recently are responsible for the same. By looking at the huge discounts at which some issues are listed, one wonders whether there is anything wrong with the way the issues are priced. I am not denying the fact that small investors should approach equity from a long term perspective; however, the huge listing loss definitely shakes their confidence. Another area of concern is that the investors are expected to thoroughly study the issuer using the Red Herring Prospectus. But the size of the prospectus is so large, that no small investor would ever have the expertise or the patience to read the same. An abridged version of the same is supplied along with the IPO application form. But, in order to achieve the objective (b) and (c) listed above, SEBI wants majority of the applications to be made through electronic form. And when one applies through the electronic route, he does not get the abridged prospectus, but the full version. I feel an abridged prospectus, written in simple language, is what the small investors are looking forward to.
Above all, investor education plays a crucial role. Retail investors, especially those from the Tier II cities, participate in IPOs based on the recommendations of their friends/relatives or by being attracted by the advertisements and internet. It is essential for them to clearly understand the risk factors involved in the issue and their future implications. While making the red herring prospectus more investor friendly, SEBI has to also take initiatives to educate the small investors. Their behaviour is well described by an old adage: Once bitten, twice shy!
From my experience of participating in the primary market (though in a limited manner) for the last 10 years, I feel the confidence levels of retail (small) investors is now at the rock bottom. The increased volatility in the market and the poor performance of many IPOs listed recently are responsible for the same. By looking at the huge discounts at which some issues are listed, one wonders whether there is anything wrong with the way the issues are priced. I am not denying the fact that small investors should approach equity from a long term perspective; however, the huge listing loss definitely shakes their confidence. Another area of concern is that the investors are expected to thoroughly study the issuer using the Red Herring Prospectus. But the size of the prospectus is so large, that no small investor would ever have the expertise or the patience to read the same. An abridged version of the same is supplied along with the IPO application form. But, in order to achieve the objective (b) and (c) listed above, SEBI wants majority of the applications to be made through electronic form. And when one applies through the electronic route, he does not get the abridged prospectus, but the full version. I feel an abridged prospectus, written in simple language, is what the small investors are looking forward to.
Above all, investor education plays a crucial role. Retail investors, especially those from the Tier II cities, participate in IPOs based on the recommendations of their friends/relatives or by being attracted by the advertisements and internet. It is essential for them to clearly understand the risk factors involved in the issue and their future implications. While making the red herring prospectus more investor friendly, SEBI has to also take initiatives to educate the small investors. Their behaviour is well described by an old adage: Once bitten, twice shy!
Sir, Red Herring Prospectus means I think here the upper and the lower prices will be disclosed but what about it, in case of IPO’s. Does this prospectus contain in detail and helpful for small investors, can’t the investors can just go through the advertisement prior issue. Here the issuing company will not be going to sell shares till the consent from regulator, right na Sir
ReplyDeleteSir....you are over estimating the retail investors from Tier I city. I know a couple of my own family members who consider the IPO as Thirupati Laddu. They feel very happy if they get alotted. Many of us(including me) are used to fill up the form with out looking in to details. Educating retail investors is critical. I also know that you have already done a workshops on that. Next time i will be participating.
ReplyDeleteCurious to know the power of friends and relatives influencing all the stages of consumer decision making process; especially the financial product like IPO's which is not so well penetrated compared to other financial products like Insurance and other savings. Can it be a project for someone?
The red herring prospectus contains lot of details regarding the issuer as well as the issue. In an issue through book-building, the prospectus gives only the upper and lower band of the price. The issue price is decided depending on the bids after the issue closes.
ReplyDeleteHi Murali...I agree with you the investors of Tier I cities are also not that educated. I remember watching in TV few years ago, people queuing up in front of BSE with IPO forms. I wondered how many of them even knew what business the issuing company was engaged in!! But what I meant is, at least a small proportion is aware of the various aspects of an issue.
ReplyDeleteYes...Investor education is very important.
Murali...thank you for the idea. There is definitely scope for a project on the factors influencing investors behaviour while investing in IPOs.
ReplyDelete