There has been a lot of discussion in the press about the reported move by the Securities and Exchange Board of India to introduce a “quiet period” prior to public offering of securities. Ajay Shah blogged in support of this idea here. The financial press in India also seems to have been largely supportive. Sandeep Parikh provides links to several press reports in his blog. Sandeep Parikh himself has been supportive of the quiet period.
The quiet period is a long established practice in the United States though as Sandeep Parikh points out, US regulations have been dramatically liberalized this year. The purpose is clearly to ensure that securities are sold using a carefully written prospectus and not on the basis of advertisements and other marketing material.
While the goal may be laudable, I think that the quiet period is basically a bad idea. First of all, I am very sceptical about any restraints on the freedom of speech. To my mind, free speech comes much higher in the hierarchy of rights than the right to property. Therefore, if somebody’s free speech conflicts with somebody else’s property rights, I would think that normally it is the free speech that must prevail. I can understand the desire to ensure that any advertising is not misleading, but I cannot understand a ban on general corporate advertising.
Secondly, in practice, the ban extends only to written material. The SEC has now clarified that written material includes videos placed on a website but it excludes communications that are carried live and in real-time to a live audience. This is immensely anti competitive and benefits only a cosy club of investment banks and other financial intermediaries. What it means that an issuer can carry a “soft” advertising message to the investor only through road shows to investor groups. Typically, it is only an investment bank that can organize these road shows. All that the SEC is doing is helping these banks collect their rents. To understand the implications of this, let us take this out of the securities setting. Imagine a rule that said that soft drinks cannot be advertised but live road shows to live audiences are allowed. The Cokes of the world would then have to pay the Walmarts to do road shows in their various retail stores and the Walmarts would surely lobby vigorously for such a rule to be kept in place. Or imagine a rule that said that election meetings and door to door campaigns are allowed but no election related advertising is allowed. Cadre based parties would love this because it increases the entry barrier for new political formations.
These general principles applies to the securities industry as to any other industry. Restrictions on advertising are anti competitive. They favour incumbents. They allow intermediaries to earn rents. Unfortunately regulators are captured by these intermediaries and it is often this regulatory capture that leads to such anti competitive regulations. Sadly, all this is done in the name of consumer protection or investor protection.