The Securities and Exchange Board of India (SEBI) has done a fine balancing act by proposing to retain the retail quota in IPOs at 35 percent while allowing large companies to enter the markets with a lower dilution, say industry experts.
On Monday, the capital market regulator released a consultation paper, which among other things, proposed retaining the retail quota at 35 percent — a reversal from an earlier proposal of reducing the retail quota from 35 percent to 25 percent.
"SEBI’s decision to retain the retail quota is a prudent measure that reinforces its ever commitment to protecting small investors. Any reduction could have raised concerns of a bias toward institutional or large market players," said Pratik Loonker, Head - ECM, Axis Capital.
"Moreover, since current rules already allow unsubscribed retail and HNI portions in an IPO to be absorbed by over subscription of demand in the institutional portion, the practical impact of a change would have been limited, especially in context of large offerings," he added.
Indeed, as the fungibility element of the current regulatory framework reduce the importance of the size of the retail portion, say experts though they add that under-subscription does impact investor sentiment.
"We have seen many IPOs sail through even when the retail segment was not fully subscribed. It did not impact the issue as such though one can say that the investor view on the company changed a bit though a good post-listing performance can erase all such memories," said an independent market expert.
In a similar context, Pranav Haldea of Prime Database says that with SEBI allowing companies to come to the market with a smaller float, the concerns of the industry around the retail demand have been largely put to rest.
"We have to acknowledge that retail investors do like to invest in IPOs and the data shows that even large issues, if attractively priced, have generated tremendous response from retail. Further, with current rules already allowing fungibility across segment, I feel this is a good move by SEBI. One very good point which has been made in the consultation paper is that several recent large issues already have significant public holding at the time of IPO, with the profile of companies coming out with IPOs having changed over the years. From 100% promoter owned firms, several companies now launching IPOs already have significant public shareholding as a result of private equity/VC and other strategic investors. For such companies, high dilution at the time of IPO is not necessary," explains Haldea.
In the consultation paper issued on Monday, SEBI said that the challenges of lower retail subscription in large issues would be addressed through the current proposal of allowing lower stake dilution for such companies.
"Proposals such as relaxed Minimum Public Offer (MPO) norms and extended timelines for Minimum Public Shareholding (MPS) compliance are steps in the right to help large Indian companies tap public markets more efficiently. These measures not only ease supply overhangs and support fair price discovery but also pave the way for more mega IPOs—strengthening market depth and breadth as well as restoring retail confidence especially after downturns," said Loonker.
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