Will new norms for QIBs impact public issues?

Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » RELATED NEWS QIBs will have to pay 100% for IPO application: Sebi

Over the weekend, the market regulator Securities and Exchange Board of India (Sebi) has changed the rules of the public issue game.

CB Bhave, Chairman, Sebi said, "It was decided by the board that in the primary issuance process, the qualified institutional buyers (QIBs) today pay only 10% money when they apply. They will be required to pay 100% money inline with what the other investors are required to do from all issues that open on or after May 1, 2010."

What implications will this have on the demand for new issues? Sandeep Parekh, former executive director at Sebi and currently at IIM-A, Brijesh Mehra, Country Head for Corporate and Investment Banking at RBS and Dharmesh Mehta, Head of Equities at ENAM, discuss.

Below is a verbatim transcript of the exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: Sebi now telling institutional investors put your money where your mouth is saying this will help avoid inflated demand in public issues and provide level playing field to all investors. Of course no one has any objection to a level playing field, but this is likely to create operational problem when you tell institutional investors that we cannot guarantee an allotment or the size of the allotment, but we expect you to put all your money upfront?

Mehra: I do not know about operational problems because whether you put 10% or 100% it's just a quantum. I think the issue about a level playing field cannot be discounted because that is a valid point, number one.

Number two, I think we are speaking in the context for the institutional investor, so we say the less than marginal cost of putting 100% cash upfront is sort of far out way, more fundamental objective for any investor which is to invest in value stories in stock market, put up a time horizon to make money for its participants whether institutional, retail participant or foreign investor.

Q: Mr Mehra is saying it's going to be marginal increase in cost, do you agree with that? If they got to put 100% of their money upfront then they are all going to wait for the last date to be able to do it because who want to lockup their money for any longer period of time. So what kind of implication that is going to have and your ability as a banker to run the book over the course of those five-seven-eight days?

Mehta: The ability doesn't change, the investors come well informed when they come in the book. The only issue here is that whether we can reduce the time of investment for this 100% margin money because end of the day there is also an opportunity cost, which nobody can measure that what kind of an opportunity can come in those 21 days. I am absolutely fine with the guideline which has come which actually makes more sense as one sees more real demand in any initial public offering (IPO).

The only thing is we have to make it more efficient for people to be motivated enough to put it as there is a 20-21 days kind of an opportunity loss in case something goes in the market up during that time which is market are very volatile at that given time. So I think it's a good move subject to we make it more efficient.

Q: What do you think of the fact that maybe this should be accompanied by shortening of the timeline between public issue being open and then the allotment being made and subsequently the company being listed and also the fact that peculiarly in India, we are faced with proportionate allotment so oddly enough institutional investors just like retail investors are going to have to put up a lot more money then they are eventually going to spend because they are definitely not going to get full allotment of what they are subscribing into?

Parekh: Going by the recent past they are likely to get full allotment, not too many issues have done too well. I agree with everything the other two people said, but I want to add one more thing, which is going to be at the margin there is going to be a serious issue with couple of people like pension funds etc who according to their chart are unable to put money 15-21 days before they get the securities. So we are going to see trouble with some people who will be unable to invest with this rule.

It's kind of a difficult situation. I think it's equitable to do this, but to remember that Sebi will also need to change the rule which today prohibits them from withdrawing the bid. Retail investors can withdraw their bid at any point of time, but the institutions are prohibited from withdrawing so. I hope that the level playing field means level playing in all aspects.