Mandatory Safety Net Mechanism

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Discussion Paper on 'Mandatory Safety Net Mechanism' Background Regulation 44 of SEBI (ICDR) Regulations, 2009 addresses the concept of Safety Net in public Issues. Excerpts from the same are reproduced below: “An issuer may provide for a safety-net arrangement for the specified securities offered in any public issue in consultation with the BRLM after ascertaining the financial capacity of the person offering the safety-net arrangement, subject to disclosures specified in this regard in Part A of Schedule VIII of SEBI (ICDR) Regulations, 2009. Provided that any such arrangement shall provide for an offer to purchase up to a maximum of one thousand specified securities per original resident retail individual allottee at the issue price within a period of six months from the last date of dispatch of security certificates or credit of demat account.” Reasons for review In the analysis of price performance of the scrips listed during 2008 to 2011, it was observed that out of 117 scrips, 72 (around 62% issues) were trading below the Issue price after 6-months of their listing. Out of those 72 scrips which witnessed fall in price, in 55 scrips the fall was more than 20% of the Issue price. In this scenario if the trend continues, the sentiments of the investors would get affected and they may lose confidence in the capital market. Thus, there is a need to provide Safety Net arrangement for RIIs to build their confidence in capital market. Discussion in Primary Market Advisory Committee meeting held on 31/07/2012 The Primary Market Advisory Committee (PMAC) was of the view that considering the recent post-listing price performance of IPOs, it is necessary to make the safety net mechanism mandatory for IPOs so as to reinforce investor confidence in capital markets and discipline issuers and market intermediaries. Thus, the Committee was, broadly, in concurrence with SEBI on the need for such a mechanism. However, the Committee was of the view that the proposed mandatory...
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