Investors protection in the primary market

To ensure healthy growth of primary market, the resting public should be protected. The term Investors protection has a wider meaning in the primary market. The principal ingredients of investor protection are: 

a) provision of all the valuable information

b) provision of accurate information

c) transparent allotment procedures without any bias.

To provide the above mentioned factors several steps has been taken. Their project appraisal, underwriting, clearance of the issue document by the stock exchange and SEBI scrutiny of the issue document.

1. Project appraisal: this is the first step in the entire process of the project. Technical and economic feasibility of the project is evaluated. If the project itself is not technically feasible and economically viable, whatever may be the other steps taken to protect the investors are defeated. Operation shows whether the project is meaning for and can be financed. The Investors protection starts right from the protection of the principal amount of investment. Based on the appraisal, the project cost is finalized. The cost should be neither understated nor overstated. The profitability of the project should be estimated and given. 20 affair project appraisal, SEBI has made it mandatory for the project appraisal body to participate a certain amount in the forthcoming issue.

2. Underwriting: once the issue is finalized the underwriting process starts. Reputed institutions and agencies, providing credibility to the issue normally underwrite the issue. If the lead managers participate more than 5% of the minimum stipulated amount of a to the public, it will increase the confidence of the public regarding with pricing and saleability of the issue.

3. Disclosures in the prospectus: SEBI has issued stringent mounts for the disclosure of information in the prospectus. It is the duty of the lead manager to verify the accuracy of the data provided in the prospectus. The pending litigation should be clearly given. The promoters credibility in fulfilling the promises of the previous issues should be stated. Eclair version of the risk factor should be given. Any adverse development affecting normal functioning and the profit of the company should be highlighted in the risk factor.

4. Clearance by the Stock exchange: the issue document has to be cleared by the stock exchange on which the proposed listing is offered. The stock exchanges verify the factors related with the smooth trading of the shares. Any bottleneck in this area will be eliminated 60 transferability is the basic right of the shareholders. Trading of the shares help the investor to liquidate his share at any time. If the issues are not traded in the secondary market at a good price, they would dampen the spirit of the investor. According to a study conducted by Mr Prithvi Haldea, between April 1992 and March 1996 out of 3872 issues 2987 were traded below the offer price. As on January 14, 1997 nearly 205 shares but not traded at all and another 118 companies just proved to be fly by night operators.

5. Signing by board of directors: the board of directors should sign the prospectus. A copies also filed with the office to the registrar of the companies. This along with the other material documents referred to in the prospectus are available for inspection by the members of the public. The minimum amount to be subscribed by the promoters are maintained for a minimum number of years also safeguard the interests of the investors. 

6. SEBI role: 

a. SEBI scrutinizes the various offer documents from the viewpoint of Investors protection and full disclosure. It has the power to delete the substantiated claims and ask for additional information wherever needed. This makes the lean managers to prepare the offer document with due care and diligence. 

b. When the disclosure of the information is complete, wide publicity has to be given in the newspapers.

c. In the allotment procedure to make sure of transparency, SEBI's nominee is appointed apart from the stock exchange nominee in the allotment committee. Inclusion of valid applications and rejection of invalid applications are checked. The representative of the SEBI's see to it that undue preference is not given to certain group of investors.

7. Redressal of investor grievances: the department of company affairs has introduced computerized system of processing the complaints to handle it effectively. The companies are requested to give feedback regarding the action taken on each complaint within a stipulated time period. If the companies do not respond and less flow in the process of settlement of complaints, panel action can be taken against the companies under the provisions of the companies Act. If the performance of the registrar to the issue is not satisfactory in settling the complaints, SEBI can take appropriate action against such registrar. Several investors association are also functioning to help investors complaint redressal promptly.