Sinha seeks to please all

Minimum guaranteed allotment for retail investors in IPOs, more money for MF distributors

The Securities and Exchange Board of India (Sebi) on Thursday made extensive changes in its rules to improve the reach of public issues, revitalise the mutual fund industry and make fund-raising more transparent. The regulator also announced a new set of norms for financial advisors and brought them under its ambit.

Retail investors will now be assured of a minimum number of shares in initial public offers (IPOs). In the previous system, allotment was done first on a proportionate basis and then on a lottery basis.

Further, the regulator has doubled the minimum application size of all retail investors from the current Rs 5,000-7,000 to Rs 10,000-15,000. To bring down the IPO timeline from 12 days, Sebi has implemented a framework to increase the reach and use of the Application Supported by Blocked Amount (ASBA). Sebi has said brokers will be given more incentives to encourage the use of ASBA by retail investors.

“Our view is that if ASBA is made available to all investors, the IPO timeline can be curtailed. Ultimately, the aim of Sebi is that it should be done in five days,” said U K Sinha, Sebi chairman.

To widen the distribution network of IPOs, Sebi has brought a new distribution framework — electronic IPOs (e-IPOs). More than 1,000 locations will be made available for distributing IPOs in electronic form.

The regulator announced steps to ‘re-energise’ the mutual fund industry, including a higher expense ratio for increasing the reach beyond the top 15 cities, and allowed fungilibilty of the expense ratio. The higher expense ratio and passing of service tax incidence are expected to leave the industry Rs 700-1,000 crore more for marketing and distribution.

CHANGING THE GAME

FOR PRIMARY MARKET

• Measure: Minimum application size for all investors increased to Rs 10,000-15,000 from Rs 5,000-7,000
  Impact: Will attract more serious retail investors to public issues
   
• Measure: Broker network of stock exchanges at more than 1,000 locations for e-IPOs
  Impact: Widen the distribution network of IPOs
   
• Measure: Banks to provide ASBA facility in all their branches in a phased manner
  Impact: Reduce the time taken from issue closure to listing

FOR MUTUAL FUNDS

• Measure: Fungibility of total expense ratio (TER) allowed
  Impact: Will help fund houses pay higher commissions to distributors
   
• Measure: AMCs allowed to charge additional TER of up to 30 bps from locations beyond top 15 cities
  Impact: May improve reach of mutual funds
   
• Measure: Investors to pay service tax on management fees
  Impact: Investors’ burden goes up by 3-4 bps

FOR COMPANIES/PROMOTERS

• Measure: Average free float market requirement cut from Rs 5,000 cr to Rs 3,000 cr for FPOs and rights issues through fast-track mode
  Impact: More companies will be able to raise funds quickly
   
• Measure: Rights and bonus issue permitted to meet the 25% public shareholding norm
  Impact: More avenues for promoters to reduce their stake below 75% and meet the June 2013 deadline
   
• Measure: Companies allowed to offer a maximum discount of 5% to the price calculated in case of QIPs
  Impact: Will facilitate QIPs even in a falling market

To help companies achieve the 25 per cent public shareholding norms before the June 2013 deadline, Sebi has allowed two new routes for companies — bonus and rights issues of shares.

Promoters or promoter groups will not be able to participate in such issues. These two avenues will be in addition to the existing four. Sinha said he would consider more avenues, if sought by companies, on a case-by-case basis. In the past, Reliance Power’s promoters have issued bonus shares to minority shareholders only. While, the move was to compensate the original allotees of the company’s IPO, this has set a precedent to reduce promoters’ stake through a bonus issue.

“It’s a positive that Sebi has agreed to consider more avenues for paring promoter holding on a case-to-case basis. It corroborates Sebi’s thinking that a lack of avenues should not come in the way of bringing down promoter holding,” said Sanjay Sharma of Deutsche Equities.

To allow more flexibility to issuers and bankers, Sebi has allowed up to 20 per cent variation in issue size as against the existing 10 per cent. However, Sebi has removed the option of withdrawal or lowering of bids from public issues.

Also, Sebi has said the IPO price band will now have to be disclosed five days before the issue. At present, the pricing is made public just two days before the issue opens.

“Announcing a price band five working days before the issue opens will benefit retail investors as they will have more days to make an investment decision based on the pricing,” said Gesu Kaushal, executive director, Kotak Investment Banking. Sharma, however, feels, this will expose the issue to longer market risks.

To improve the quality of offerings, Sebi has said companies willing to do IPOs will need to have a minimum average pre-tax operating profit of Rs 15 crore. However, companies that fail to meet this requirement will have to use either the SME platform or the compulsory book-building route with increased institutional participation of 75 per cent as against the existing 50 per cent.

Sinha has said Sebi will now work towards expeditiously clearly offer documents for public issue and will also have the right to reject offer documents. He said the decisions were part of the IPO reform process announced earlier in the year and would have a “far-reaching impact”.