NEW DELHI: Underwriting could become mandatory for the initial public offers (IPOs). The proposal is part of the initiatives which are under consideration of the market regulator to discipline the primary market and ensure quality paper.
An underwritten issue, it is understood, would also give confidence to investors that the issue has been vetted by domain experts after considering the risk factors. It could help obtain better pricing as institutions would not want to underwrite issues that are over-aggressively priced and run the risk of devolving substantially. The move comes in the backdrop of some of the big IPOs - Emmar MGF, Wockhardt etc - being called off. In February, these issues were called off by the promoters after failing to woo investors following cut in price band and extension of deadline.
The proposal has already been given an in-principle go-ahead by the Primary Market Advisory Committee, which is at present discussing the issue of making the IPO process more efficient and transparent. The nitty-gritty of its implementation, however, is yet to be firmed up, sources told ET. However, the proposal will finally have to be cleared by the SEBI board before it is implemented.
"If an issue is not able to get subscription, the underwriter should come forward to subscribe it. Why should an issue be called off or dates extended? The move is in the overall interest of the investor and markets. It would ensure that only quality paper comes to market," Association of NSE Members of India past president KL Garg said.
At present, underwriting is optional and bankers prefer soft underwriting in which the underwriter agrees to buy the shares at later stages of the offer, after book-building is complete and pricing has been done. Moreover, the underwriter has to put in money only if investors after bidding for shares default in payment on allotment.
During the Controller of Capital Issues regime, hard underwriting in which the underwriter agrees to buy shares at its early stage prior to the opening of the issue was compulsory. Even after free pricing was introduced under Sebi regulations, hard underwriting was mandatory in the first few years.
Experts feel that mandatory underwriting will increase issue expenses, because of the underwriting fee that would have to be paid to underwriters, but it would make the issue safe for the issuer. The total cost of an issue ranges from 0.5% to 3% of the issue size depending on the size. It is less for bigger issues and more for smaller issues. Since failed issues disturb the market, the proposal is good for the overall health of the market.
Former BSE VP, Deena Mehta, says: "In exchanges we have a trade to guarantee fund which is there to ensure that every trade will be honoured by the exchange. If this is the kind of discipline we are trying to bring in into the primary market, it would be great."
An underwritten issue, it is understood, would also give confidence to investors that the issue has been vetted by domain experts after considering the risk factors. It could help obtain better pricing as institutions would not want to underwrite issues that are over-aggressively priced and run the risk of devolving substantially. The move comes in the backdrop of some of the big IPOs - Emmar MGF, Wockhardt etc - being called off. In February, these issues were called off by the promoters after failing to woo investors following cut in price band and extension of deadline.
The proposal has already been given an in-principle go-ahead by the Primary Market Advisory Committee, which is at present discussing the issue of making the IPO process more efficient and transparent. The nitty-gritty of its implementation, however, is yet to be firmed up, sources told ET. However, the proposal will finally have to be cleared by the SEBI board before it is implemented.
"If an issue is not able to get subscription, the underwriter should come forward to subscribe it. Why should an issue be called off or dates extended? The move is in the overall interest of the investor and markets. It would ensure that only quality paper comes to market," Association of NSE Members of India past president KL Garg said.
At present, underwriting is optional and bankers prefer soft underwriting in which the underwriter agrees to buy the shares at later stages of the offer, after book-building is complete and pricing has been done. Moreover, the underwriter has to put in money only if investors after bidding for shares default in payment on allotment.
During the Controller of Capital Issues regime, hard underwriting in which the underwriter agrees to buy shares at its early stage prior to the opening of the issue was compulsory. Even after free pricing was introduced under Sebi regulations, hard underwriting was mandatory in the first few years.
Experts feel that mandatory underwriting will increase issue expenses, because of the underwriting fee that would have to be paid to underwriters, but it would make the issue safe for the issuer. The total cost of an issue ranges from 0.5% to 3% of the issue size depending on the size. It is less for bigger issues and more for smaller issues. Since failed issues disturb the market, the proposal is good for the overall health of the market.
Former BSE VP, Deena Mehta, says: "In exchanges we have a trade to guarantee fund which is there to ensure that every trade will be honoured by the exchange. If this is the kind of discipline we are trying to bring in into the primary market, it would be great."
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