Capital markets regulator Securities and Exchange Board of India (Sebi) has said spillover from the retail category to the qualified institutional buyers (QIBs) category in initial public offerings (IPOs) will not be permitted.
In other words, any public offering will need compulsory participation from QIBs, which, among others, includes foreign institutional investors (FIIs), mutual funds and insurance companies.
The move was prompted after a number of IPOs last year saw zero participation from institutional investors and were filled only due to retail subscription. Incidentally, some of these IPOs were later banned by the market regulator for irregularities and violation of norms.
According to legal experts tracking the capital markets, Sebi has now clubbed the QIB and non-institutional investor categories, commonly known as the high net worth individual (HNI) category, into one bucket and has said that spillover from the retail sector will not be allowed into this bucket. In other words, if an IPO fails to generate a minimum 65 per cent demand for QIBs and HNIs, either the issue will have to be withdrawn or will have to be underwritten by merchant bankers.
A lot of IPOs last year managed to sail through only on retail participation
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|Source: BS Research Bureau|
This new norm comes into effect after Sebi amended the Issue of Capital and Disclosure Requirements (ICDR) on October 12.
According to the earlier rules, spillover from one category to another was permitted to the extent of undersubscription in that category.
Last year, at least four IPOs had seen no bids from QIBs and the issues managed to sail through just on the back of oversubscription by the retail segment.
Market experts say the decision to not allow spillover from retail to QIB, will help reduce manipulation. The retail category, they say, can be easily manipulated with fake applications; however, QIB applications are mostly genuine.
“QIBs are considered to be more sophisticated investors and are known to have the wherewithal. If they abstain completely from an IPO, something may not be right with the issue,” said a senior official in charge of IPO distribution with a domestic merchant bank, who did not want to be named.
For IPOs done through the book building process, 35 per cent of the net offer is reserved for QIBs. Up to 15 per cent is meant for HNIs or corporates who bid for more than Rs 2 lakh. The remaining 50 per cent is reserved for retail investors, which are individual investors who invest up to Rs 2 lakh.
As reported earlier, Sebi has also redesigned the profitability criteria for companies wanting to tap the capital markets. Corporates will need to have a minimum average pre-tax operating profit of Rs 15 crore in three of the preceding five years. If companies fail to meet this criterion they will need an increased QIB participation of 75 per cent as against the existing 50 per cent in IPOs or will have to list on the SME platform.