In a move that will certainly be welcomed by the investment banking and broking community, Securities and Exchange Board of India (Sebi) has proposed to increase the investment limit for retail investors in public issues. In a discussion paper released on Wednesday, the market regulator said the limit could be enhanced to Rs 2 lakh from the current cap of Rs1 lakh. Market participants have been asked to submit comments on the proposal before September 3.
The Rs 1-lakh cap has been the subject of much debate in the recent past. Market participants demanded an increase, especially after mega issues started hitting the market at regular intervals. The low investment limit requires lakhs of applications from small investors for the retail portion to be fully subscribed, making it a logistical nightmare, they say.
For example, in a Rs 5,000-crore issue, a 35 per cent reservation for retail investors would require Rs 1,750 crore to be raised through small investors. Assuming every retail investor submits a bid for Rs1 lakh, it would require 175,000 applications for the segment to be fully subscribed. Not surprisingly, quite a few recent issues that were subscribed more than one time saw the retail portion remaining undersubscribed.
“This could be a daunting task, considering that in the case of well oversubscribed issues, the number of applications received from retail individual investors was in the range of 35,000 to 70,000,” notes the Sebi paper.
The issue of attracting retail investors in public issues has been high on the regulator’s agenda. Only recently, it allowed issuers to close the bidding for qualified institutional buyers one day prior to retail investors. The premise was that retail investors would get enough time to make investment decisions based on the appetite of institutions.
“It is more than five years since the limit of Rs 1,00,000 for defining a retail individual investor was stipulated. It is felt that the aforesaid limit… needs to be enhanced,” notes Sebi’s discussion paper.
The move by the market regulator gains significance also because the government is looking to divest its stake in a number of public sector undertakings that would see large-size issues become a regular feature. Coal India, for instance, would see its retail portion at over Rs 4,000 crore. With a cap of Rs1 lakh, 400,000 retail applications would be needed for the segment to be fully subscribed.
| PUBLIC ISSUE # Market participants say current limit requires lakhs of applications from small investors for retail portion to be fully subscribed # Attracting retail investors is high on Sebi’s agenda and it recently instituted measures to help them gauge institutional appetite # The move gains significance because of the upcoming large issues proposed under government’s disinvestment programme # However, some market watchers say a better approach would have been to increase the allocation for retail investors |
According to the regulator’s analysis, approximately 75 per cent of applications in the retail category have come in the size of Rs 80,000-1,00,000.
Meanwhile, in the non-institutional investor category, the number of applications in the size of less than Rs 5 lakh has been negligible.
“The above suggests that retail individual investors who have the capacity and appetite to apply for securities worth above '1,00,000 were constrained from doing so because of the Rs 1,00,000 limit nor do they make an application under the non-institutional investor category because the allocation there is limited to 15 per cent, as against 35 per cent for retail individual investor category,” Sebi explains.
However, not everyone agrees with the market regulator’s reasoning. “The correct approach would be to increase the allocation for retail investors. Enhancing the investment limit will create a sub-HNI segment in a public issue,” says Prithvi Haldea of Prime Database.
In the discussion paper, Sebi has also highlighted the point that the BSE Sensex and inflation rate have risen substantially since the last time the investment limit was increased, which means retail investors “now buy a lesser number of securities with '1,00,000 than they would buy with the same amount in 2005”.
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