Margining for QIBs under consideration

10% margin may be levied on IPO applications, level playing field for other investors targetted

Qualified institutional buyers (QIB) might well find that the edge that they enjoy over other categories of investors might be blunted if the Securities and Exchange Board of India (Sebi) manages to get its report, on improving the securities market infrastructure, approved in its current form.

The Securities Market Infrastructure Leveraging Task Force (SMILE), which has submitted its final report, has said that a ten per cent margin should be imposed on every QIB bid, to be remitted to the issuer's escrow account.

At present, QIBs do not have to pay any money with their application and have to bring in the required amount of money only on their allotments being confirmed. Other categories of investors, however, have to pay the full amount along with their applications and then refunds are paid out to them depending on the allotments done.

The Sebi committee has taken cognisance of this unequal footing on which the two categories of investors are placed and the proposal for a margin has been done with a view to bring in some parity.

Allotments to QIBs are done on a discretionary basis, so sometimes it happens that a QIB who has made application for a large amount may not be given anything at all.

In fact, it is a reality that some of the QIBs, especially foreign institutional investors, depend a great deal on merchant bankers or their brokers to advise them on how much to apply for. The final allotment is often dictated by their relationship with each other. There is often an endeavour to manipulate the final price through such applications.

The Sebi report itself has observed, "Persistent rumours that such applications are meant to show an inflated book in the early stages of the issue, thereby luring unsuspecting retail investors who are impressed by the size of the "multiple" which is often taken as a proxy for a "good" issue, thereby gain credence. This merits an intervention."

Such "gaming" it has pointed out, is harmful to the issuer and unfair to the retail investors.

The committee has also toyed with the idea of not allowing QIBs to reverse their bids, as a way to solve the problem but has observed that this would be, "unfair as a revision of bids is fundamental to the process of bidding and price discovery." It is in this context that the proposal of margin requirements has been introduced.

"The level of margining should not discourage applicants who bid in accordance with their requirements but should dampen attempts by others to inflate their bids," the report suggests.

Merchant bankers said that another very simple way of solving the issue would be to introduce proportional allotment system for QIBs as well.

Once this is done, then there would be no issue of false bids or false prices. There can also be a graded system of pricing for QIBs and the allotment should be done at the price at which they bid for. And the lowest price can be taken as the price for the retail investors.