IPO rules revamp: Primary market will be more resilient with higher DII participation, say bankers

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Industry participants have welcomed the latest set of suggestions from the Securities and Exchange Board of India (SEBI) aimed at increasing the mutual fund quota in initial public offers (IPOs) while carving a separate space for life insurance companies and pension funds in the anchor book.

The proposals will help increase the overall domestic institutional investor (DII) participation in the primary markets, they say, highlighting the fact that Indian markets have shown a lot of resilience in the recent past on the back of strong DII presence.

"This is a good move for both institutional and retail investors. Increasing the mutual fund portion is an indirect way of ensuring that retail investors come through professional fund management route," said Dharmesh Mehta, MD & CEO, DAM Capital Advisors.

On Thursday, the capital market watchdog released a consultation paper, proposing to reduce — from the current 35 percent to 25 percent in a graded manner — the retail portion in IPOs exceeding Rs 5,000 crore in size while, at the same time, enhancing the portion reserved for mutual funds thereby giving retail investors an indirect increased room for participation.

"This is a good move by SEBI and the aim appears to be to increase retail participation through the mutual fund route while also enhancing the domestic institutional participation within the overall institutional portion," said Uday Patil, executive director, Prabhudas Lilladher Capital Markets.

"Times have changed and the existing category limits were set many years back. The proposed norms are more in sync with the current time," added Patil.

Apart from proposing a change in the retail quota, the capital market regulator has suggested creating a separate portion for life insurance companies and pension funds in the anchor book.

Currently, domestic mutual funds have a 33 percent reservation in the anchor book. SEBI has suggested a 40 percent quota for three categories of investors — mutual funds with 33 percent with the balance seven percent for life insurance companies and pension funds.

"Carving out space for insurance and pension funds in the anchor book will ensure higher domestic representation in the book. Raising the overall QIB book size is also a move in the right direction," said Mehta.

Meanwhile, the SEBI consultation paper has also proposed enhancing the reservation for mutual funds from the existing five percent to 15 percent in the non-anchor QIB category.

A SEBI study released in September 2024 showed that individual investors sold 50 percent of the shares allotted to them by value within a week of listing, and 70 percent of shares by value within a year.