SEBI may ensure IPOs get underwriting shield

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New Delhi: As part of its initiatives to discipline the primary market, the market regulator Securities and Exchange Board of India (SEBI) is considering the proposal to make underwriting mandatory for initial public offers (IPOs). The move will make sure that the quality papers are available for investors, reported The Economic Times. An underwritten issue would 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 - being called off by the promoters in February after failing to woo investors despite a cut in the 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. However, the nitty-gritty of its implementation are yet to be firmed up, sources said. 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 to 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," said K L Garg, past president, Association of NSE Members of India. 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 and pricing has been done. 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.