Should QIB allotments be proportionate or discretionary?

Discretionary system is okay

Sanjay Sharma
Head-equity, DSP Merrill

The practice of discretionary allocation to qualified institutional bidders (QIBs) has worked well in the past, as witnessed in the scores of book-built offerings made in the last few years.

Discretionary allocation helps get the best price for the issuer and ensures that the stock is allocated in manner that good quality QIBs get higher allocation.

In fact, while exercising discretionary allocations, book running lead managers (BRLMs) take into account quite a few quantitative and qualitative factors such as time and price of order, sector focus of the investor, exposure to Indian markets and peers in particular, past post-listing behaviour among others.

The reason for this is within the QIB category itself, investors differ significantly from each other in terms of investment philosophies, commitment to markets and sectors and quality.

Should proportionate allotment, instead of discretionary allotment, be allowed, it might result in all types of QIBs getting the same allocation. This could lead to a situation where leveraged funds get higher allocation than long-term investors, which could be detrimental for after-market performance.

The fact that QIBs do not pay any upfront margin is also often questioned. The requirement to levy/not levy margin arises from the risk perception of the category. Thus, QIBs being regulated entities have lower risk of financial default, hence, no margins are levied on them in book-building.

This is similar to the secondary market where QIB trades are exempt from margin requirements, while non-QIB participants are required to pay margins.

Further, margin requirement for QIBs may result in inefficient utilisation of money as funds are blocked for 15 days, thereby, affecting NAVs of mutual funds and other QIBs negatively. Such a situation will ultimately be detrimental to retail investors of such mutual funds and other QIBs.

Therefore, it can be concluded that the existing system of discretionary allocation to QIBs is serving its objectives well.

(The views of the writer are his own and the company does not subscribe to it)

Bidding process is skewed

Sunil Goyal
Chartered accountant

There are ample independent reasons, which call for review and rationalisation of the present norms of allotment to QIBs.

The very objective of price discovery mechanism (PDM) through bidding by QIBs seems to have been dragged in the backyard as the price is generally decided informally even before opening of the bid.

In the absence of any margin money (application money) requirement, merely a fax message to BRLM is sufficient for a QIB to bid for any quantity.

This tends to create a situation of high artificial demand. With the presence of this lacuna in the system, even those QIBs who might not be having any serious intention to acquire even a single share, may bid for large quantity and help the company and the BRLMs to attract other QIBs, HNIs or retail investors.

Conversely, the issuer could attempt to create artificial shortage of liquidity by allotting larger quantity of shares to "favourites" with "due understanding".

Allowing QIBs to amend/withdraw the bid is also offering large scale scope of creating a synthetic hype in the market. Absence of pre defined standard parameters of allotment to QIBs further fuels this alleged situation. At present, BRLMs need to disclose parameters of QIB allotment, which can be framed in the manner best suited to them.

The argument, for discretion in allotment to QIBs, to bring quality investors is no more valid as brokerage income to associate arms of BRLMs seems to be of prime importance and also there is no standard definition of quality.

This is more so when there are more than one BRLM, infighting among themselves for allotment of shares to their respective favourites.

Sebi, looking at the misuse of this discretion, had constituted a sub-group under the primary market advisory committee to give its recommendations to enable the regulator to amend the relevant guidelines.

The regulator's timely action shall bring in the much needed rationalisation and discipline in bidding process in public issues.

(The views of the writer are his own and the institute does not subscribe to it)