The  post has been authored by CA Karan Batra who is a visiting faculty member at the Institute of Chartered Accountants of India

With the Stock Markets having regained momentum and Sensex again about to touch the 20,000 mark, the investor confidence has started coming back. Since P. Chidambaram took over the Finance Ministry on 31st July 2012, the Stock Markets have gained over 15% till date in the past 5 months, as Chidambaram has been able to push through major reforms like FDI and various other regulatory changes. Moreover, with Chidambaram now being in charge of the Finance Ministry, investors are now expecting clarity on the various Income Tax related issues which were Pranab Mukherjee was not able to address during his stint as the Finance Minister.

All of a sudden the Stock Markets have gained momentum and voices of the markets touching new highs have started coming up. And IPO’s are always the first to catch on with the regained momentum as they would be able to sell their shares at a higher rate. I’ve been a close watcher of the Stock Markets for over 6 years now and have observed that whenever stock markets are at a high, IPO’s start coming up.

And with the govt having announced that listed companies now have to comply with the new thresh-hold requirements of every company having 25% public shareholding a dearth of IPO’s is expected to hit the Stock Markets soon.

This may be good news for those who expect to make a listing gain and expect to make quick bucks in a couple of weeks. But, this may also be bad news for those who want to invest for the Long Term.

Problem with the Existing System

There are many speculative individuals who invest in IPO only for the purpose of listing gains and then quickly sell as soon as the share gets listed. Due to speculative interests of various individuals, the no. of bids received for IPO’s increases significantly as a result of which shares are allotted only on pro-rata basis. Moreover, with SEBI in the month of August 2012 having announced new norms for allotment of IPO’s, all the Investors don’t even get shares on pro-rata basis.

As per the new norms announced by SEBI in August 2012, in case of over-subscription – shares should be allotted on a lucky draw basis. With shares in IPO now being allotted on lucky draw basis, this is purely a gamble as there is no surety of whether the shares would be allotted or not.

Due to speculative interests of various investors and this new SEBI Policy, there are many investors who couldn’t even get a single share in IPO as the allotment was done on Lucky Draw basis.

This Lucky Draw basis of allotment is very unfair to genuine investors. Because of this new lucky draw system of allotment, many speculative investors are being allotted shares and genuine long term investors are being ignored.

Allotting shares to speculative investors is not in the best interests of the company as the sole aim of these speculative investors is to earn short term capital gains and they very quickly sell their shares on the stock markets as a result of which the prices come down immediately post listing. It is always the long term genuine investors who stick with the company.

The Solution

I firmly believe that if SEBI introduces a mandatory lock-in period for all IPO’s, many speculative investors will run away. Even if a small lock-in period of 2 month is enforced, many speculative investors will run away as they tend to invest for not more than a few weeks

Although, a new section 80 CCG (Rajiv Gandhi Equity Savings Scheme) has been inserted in the Income Tax Act for those investors who invest in IPO’s and has a lock-in period attached to it, this section does not apply to the masses as it only applies to those who are first time investors, and not on regular investors. This Section encourages new investors to invest in the Stock Markets and does not apply to the existing individuals who already have a Demat Account and trade on the Stock Markets.

I firmly believe that SEBI needs to rethink its strategy regarding allocation of shares in an IPO if it wants the public to stay invested in Stock Markets. SEBI itself is preaching the practices of speculative trading and then expects Individuals to stay invested in such kind of speculative markets.

The above post has been authored by CA Karan Batra who is a visiting faculty member at the Institute of Chartered Accountants of India

 Do you invest in stock market for listing gains? Do you agree with the problems in the existing system of IPO allotment? Do you agree with the solution offered?