The Securities and Exchange Board of India (SEBI) is mulling reducing the retail portion in initial public offers (IPOs) exceeding Rs 5,000 crore in seize while, at the same time, enhancing the portion reserved for mutual funds thereby giving retail investors an indirect increased room for participation.
"... it is proposed to revise the issue structure for large IPOs (i.e., those exceeding ₹5,000 crore) under Regulation 6(1) of the SEBI (ICDR) Regulations. Specifically, the allocation to the Retail category may be reduced from the existing 35% to 25% in a graded manner, while the allocation to the QIB category may be increased from 50% to 60% (up to 8000 crore)in a graded manner," stated the SEBI consultation paper.
"Simply put, in case of large IPOs, the size of the Retail portion increases substantially and requiring significant Retail participation. This is specially challenging in tepid or uncertain markets. Due to global situations and conflicts in different parts of the world, equity markets have been volatile resulting in launch windows becoming narrower. While overflow of demand is permitted in IPOs from retail to QIB category, undersubscription has a negative impact on the sentiment for the IPO and also creates a negative perception," added the SEBI paper.
The capital market regulator further highlighted the fact that data across over 280 IPOs since 2020, showed that given the current allocation methodology in retail portion, the average application size is approximately Rs 20,000.
This would translate into a need for at least 7-8 lakh applications for an IPO of Rs 5000 crore and at least 17.50 lakh applications for an IPO of Rs. 10,000 crore for one time subscription, stated the SEBI paper.
The watchdog further explained the rationale of its suggestions with the fact that mutual funds have a five percent reservation within the QIB category in both anchor and non-anchor portion and that also represents retail investors as such.
"Reducing the retail portion from 35% to 25% in a graded manner and increasing the QIB share to 60% in a graded manner better reflects market realities, ensures demand stability, and enhances issuer confidence in volatile or clustered market conditions," it said.
More importantly, the SEBI consultation paper proposed enhancing the reservation for mutual funds from the existing 5 % to 15% in the Non-Anchor QIB category.
"While direct participation by Retail investors has remained flat over the last 3 years, their participation through MFs has seen a secular uptick. Thus, the lower allocation to the Retail portion would be compensated by the higher reservation for domestic MFs in the QIB portion," stated the SEBI paper.
Incidentally, as per the regulator's own analysis, the change in the retail portion and also that of mutual funds would lead to a very small change in the net room for bidding for retail investors. As per the SEBI paper, the effective room for retail participation would change from the current 46 percent to 44 percent of the IPO size.
The SEBI consultation paper has been issued with the objective of facilitating ease of doing business and addressing practical challenges in the current framework relating to discretionary allotment under anchor portion in IPOs, reservation for allocation for life insurance companies registered with IRDAI and pension funds registered with PFRDA along with domestic mutual funds in the anchor book and flexibility in sizing the retail portion in large IPOs.
Among other things, the regulator has also suggested increasing the number of permissible anchor investor allottees for allocations above Rs 250 crore. "Specifically, a minimum of 5 and a maximum of 15 investors shall be allowed for allocations up to Rs 250 crore. For every additional Rs 250 crore or part thereof, an additional 15 investors instead of 10 may be permitted, subject to a minimum allotment of Rs 5 crore per investor," stated the SEBI paper.
The regulator has also proposed including insurance companies and pension funds in the reserved category of anchor portion along with mutual funds. It has further proposed increasing the reservation from existing 33 per cent to 40 per cent of the anchor investor portion for life insurance companies registered with IRDAI and pension funds registered with PFRDA and domestic mutual funds.
"Provided that one-third of the anchor investor portion shall be reserved for domestic mutual funds, and the remaining 7% shall be reserved for Insurance companies and Pension Funds. In case of undersubscription by Insurance Companies/Pension Funds in the 7% reservation for them, the unsubscribed portion of such reservation shall be available to domestic Mutual Funds," stated the SEBI paper.
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