Though the Securities and Exchange Board of India’s (Sebi) decision to change the allotment process for initial public offerings (IPO) is aimed at providing allotment to all retail applicants, it may have some unintended consequences.
Market experts say the new process will lead to a sharp drop in average application size, encourage multiple applications during popular issues and hurt IPO financing.
The new allotment process gives preferential allotment to all investors in the retail category irrespective of the application amount. Under the erstwhile process, allotment was first made on proportionate basis and then on lottery basis.
| DECODING THE NEW ALLOTMENT SYSTEM |
Changes
Impact |
- Most investors likely to bid for single lot
- Will encourage multiple applications
- IPO funding will take a beating
- Bulk of applications will come few hours before closing
For IPOs, which will be hugely oversubscribed, all retail applicants will be given uniform allotment of one lot. This will act as a disincentive for investors to bid for more than one lot, say experts.
“It will make sense to apply for just one lot, someone who bids more will be at a loss, especially for issues that get good response,” said Arun Kejriwal, director, Kejriwal Research and Investment Services.
Take, for instance, the Rs 660-crore IPO of the Multi Commodity Exchange (MCX), which had received retail subscription of more than 24 times and had garnered over 700,000 applications. Investors who had applied with application amounts of Rs 2 lakh got guaranteed allotment, while only one investor out of 30 who had applied for one lot got allotment on the basis of a lottery.
In similar cases, under the new allotment system, someone who bids just one lot will be on equal footing with someone who applies for maximum lots.
Prithivi Haldea, chairman and managing director of Prime Database, said only a handful of issues get MCX-like responses, but largely issues won’t get filled with just small applications.
“Only half of the issue might get filled with small applications, rest of it will get divided with investors who apply for more shares,” he said.
Experts said investors will now be encouraged to put in multiple applications to get higher allotment of IPOs that are likely to see huge retail interest.
“Very clearly it will make better sense to apply for just one lot through multiple accounts of family members. Applying with a higher amount will work for IPOs that don’t see very high subscription,” said Kejiriwal.
Under the new process, once allotment is made to all applicants the balance amount will be divided between investors who bid for more than one lot.
The new system is also likely to hurt the IPO financing business, say experts. Currently, a lot of retail investors opt for funding to bid for the highest application amount of Rs 2 lakh. However, to bid for just one lot worth just Rs 10,000-15,000 hardly anyone will go for financing, they say.
At present, the average application amount for IPOs is approximately Rs 1 lakh, which experts say, is likely to come down sharply.
