Sebi plans to shield small investors from presumably 'risky' IPOs

Certain initial public offers may only be for institutional investors

The Securities and Exchange Board of India (Sebi) is considering the concept of institutional investor-only initial public offerings (IPOs) to shield small investors from presumably risky issues by new-age technology and e-commerce firms. Regulatory and investment banking sources said the regulator is deliberating whether more steps are required to safeguard investors before it allows loss-making companies, such as food delivery company Zomato, to tap the public market.

Banning direct retail participation and mandatory “safety net” are some of the concepts being discussed, said people in the know.

Domestic IPOs, typically, have two broad equal quotas for institutional and non-institutional investors. The non-institutional portion is further split 70:30 between retail (those investing up to Rs 2 lakh) and high net-worth individuals (those investing more than Rs 2 lakh). In 2012, Sebi had lowered the retail quota from 35 per cent to just 10 per cent of the overall IPO size in the case of companies that didn’t have a profitability track record.

An institutional investor-only IPO would mean small investors would either have to opt for indirect exposure through the mutual fund (MF) route or invest in the HNI quota where the minimum ticket size would go up.

Investment bankers’ lobby group Association of Investment Bankers of India (AIBI) in the past had made a representation to Sebi to allow institutional investor-only IPOs — a concept prevalent in developed markets, such as the US. The regulator in the past had been averse to the idea, fearing a backlash from the public. 

However, as companies that are unlikely to turn profitable in the near future look to go public, Sebi is seeing the idea in a new light, said investment bankers.

An e-mail sent to Sebi didn’t elicit any response immediately.

Earlier this year, South Korean regulator Financial Supervisory Service warned retail investors to be cautious of IPOs of promising but still loss-making companies.

Experts are divided on the idea of keeping retail investors entirely off such IPOs.

In today’s day and age, the average retail investor has proven to be informed and progressive and has portrayed a high-risk appetite. In light of the same, the proposal may not prove to be in sync with investment demands in the current economy,” said Gaurav Mistry, associate partner, DSK Legal.

Amrita Tonk, partner, L&L Partners, said: “Sebi has to protect small investors from companies that have not done very well and don’t generate good returns for investors. However, the regulator will have to do a fine balancing act to ensure that the clause is rational and not arbitrary.”

The US is considered to be the go-to-market for technology and start-up IPOs. India is yet to witness too many listings on this front. However, given certain advantages of domestic listings, companies like Zomato have opted to list domestically. The IPO is being looked at as a litmus test for start-up IPOs in India.

Investing in IPOs of loss-making e-commerce companies could entail that returns could have a longer gestation period. Also, such companies might not have the ability to pay dividends. Typically, such companies value their shares based on their growth potential and not existing financials. So, for a retail investor to take exposure in such companies at the time of an IPO may be a risky proposition,” said Prashaant Rajput, partner, White & Brief Advocates.

India follows a disclosure-based regime for IPOs where the regulator doesn’t dictate the pricing of an issue. However, the market regulator is known to take a cautious approach.

In 2013, Sebi had nudged Just Dial to offer a safety net to investors -- a clause that made the company compensate small investors if the stock fared badly upon listing. As the shares of the local search engine did well post listing, the safety net provision was not invoked.