Mutual funds to get quota in IPOs

Cap on individual investor's bid likely.

Domestic mutual funds are likely to be a separate category for the book-building process in primary offerings. A final decision on this will be taken at the Securities and Exchange Board of India's board meeting on Friday.

Currently, all institutional bidders come under the category of qualified institutional buyers (QIBs) for whom 50 per cent of the offers are reserved.

A Sebi official said the move would serve the dual purpose of ensuring that merchant bankers did not mete out unfair treatment to local institutions, which usually had smaller pockets than their foreign cousins, and increasing the retail participation in primary offerings, though indirectly. Other local institutions like banks might also be clubbed under this category, the source added.

Besides, all QIBs will be asked to cough up margins along with their bids. This margin amount will be nominal at around 10-20 per cent. However, Sebi will continue to allow QIBs to change their bid prices at any time during the offer.

Another possible move could be to introduce a cap on the total amount an individual investor (institution) could bid for. Currently, a QIB bidder can bid for 100 per cent of the total shares available on offer.

In several recent issues, there have been cases where QIB bidders have bid amounts close to the total offer size to secure good allotments anticipating huge institutional demand.

Since most institutional bidders tend to put up exaggerated bids, the subscription figures tend to get distorted, misguiding retail investors in the process. The idea was to ensure that the bids were closer to genuine market demand, said the Sebi official.

Even though the finance ministry has been clamouring for encouraging greater retail participation by increasing the quota for retail investors, this may not happen in a hurry.

At present, 50 per cent of the shares on offer are reserved for retail investors along with high networth individual investors. That should stay for a while. The quota for mutual funds should ensure that retail investors benefit.

Unlike in debt funds, a substantial chunk of the money deployed in equity mutual funds is from retail investors. So small investors can benefit from greater allocation to domestic mutual funds.

Given that in most primary offerings there is a gain of at least 30-40 per cent on listing these days, mutual fund managers have been bidding aggressively in IPOs.

SMALL PLAYERS GET A CHANCE

THE SEBI move will increase retail participation in primary offerings

IT WILL ensure that merchant bankers do not mete out unfair treatment to local institutions

ALL QIBs will be asked to pay 10-20 per cent margins along with their bids