Latest additions to listing agreement by SEBI – a good move

SEBI announced a couple of additions to the listing agreement today (Read here). One of the additions deals with monitoring how the companies are investing money that they just collected through the public issue (IPO as we call it). SEBI is making it mandatory for all the companies who have gone public in the recent past to submit a report analyzing how the money, that was raised through the public issue, has been used, to the audits committee along with any remarks made by the audits committee. The companies have also been told to publish the report along with all the comments (good/bad) in the newspapers. 

People who are watching the growth of Indian stock markets in last few years, are very well aware of number of public issues announced every month in India and number of issues which perform below average. Just to give a sneak peek into the statistics, look at the chart below.

   

Since 2005, Indian investors have subscribed to 253 public issues, out of which 22% (55) are giving negative returns which go down to -65%, 10% are providing a return between 0 and 20%, which is not a great number compared to the returns from the existing stocks in the markets. For a country like India where interest in equity investment has risen steeply in last few years, the number ‘253’ itself is quite high. More and more people are investing in stock market and no one is in a mood to miss the IPO bus. Both small and big business houses are making use of this opportunity by issuing IPOs with premium anywhere between 500% and 8000%, which is quite huge.  In this situation, today’s move by SEBI is really commendable. Common investor now can be assured now that if their money is not used by the issuer as he had promised, then investor will at least come to know through SEBI/exchange newsletters or the advertisements in the newspapers (as is made mandatory by SEBI). On a side note, Red Herring Prospectus (released by the issuer along with the IPO) contains the details about how the capital collected through IPO would be put to use. This information is a key input used by most of the analysts to rate the IPOs.