Safety net

Safety net A product of volatile markets in which investors are wary of putting up money for new issues, particularly at a premium, this guarantees buyback of the shares of the issuing company at the issue price if the share price falls below what the investor has paid. The offer is made by the lead merchant banker to the issue and is valid for a certain number of months, for a certain proportion of the issue. The first safety net was provided by the merchant banker, Kotak Mahindra Ltd, for the Godrej Soaps issue of 10 – rupee shares at a premium of Rs. 130. The emergence of the safety net is a comment on the health of the Indian stock market and the prevalling tendency of many companies to charge exorbitant, and sometimes unjustified, premia. The safety net offered tells the investor that the lead manager to the issue has not recommended the premium light – heartedly, and that he is prepared to put his money where his mouth is.

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