For some time now, retail investors in Initial Public Offerings(IPOs) have resented the fact that they had to pay up the full amount for the shares they were applying for, whereas larger institutional investors were getting away by paying a small fraction of the bid amount. In fact, Qualified Institutional Buyers (QIBs) paid nothing for a long time, until the regulator stepped in to say they needed to cough up at least 10 per cent of the value of the shares applied for. Now the Securities and Exchange Board of India (Sebi) wants to go the whole way and is toying with the idea of asking institutional investors to pay the entire cost of the shares that they’re looking to pick up. The idea, apparently, is to create a level playing field.
Are retail investors really being discriminated against? The ASBA facility (application supported by blocked amount) available today allows investors to continue to earn interest on the application money, on which a lien is created by the bank, though they cannot use that money for any other purpose. So the money is not really lying idle. Moreover, there is no question of money being locked up in refunds because, on allotment, the exact amount is debited from the investor’s bank account. Given the large number of applications made for an IPO—anywhere between three and five lakh—and the fact that physical forms have to be reconciled with electronic bids and thereafter investors’ cheques, it takes about 21 days for allotments to be made and the refund cheques to be mailed, and about a week thereafter for the scrip to get listed.
If Sebi goes ahead with its proposal, application money put in by mutual funds (which are acting on behalf of other investors) will be blocked for three weeks unless they too are provided with an ASBA facility. Funds put in by foreign institutional investors too will be blocked and it’s the issuer and the banks who will enjoy the float. It is possible that institutional applications were being inflated, perhaps by the merchant bankers rather than the buyers themselves, with a view to giving the market the impression that demand for a particular IPO was high. But retail investors or even high net worth individuals should not be looking to institutional demand for guidance on the quality of the paper being sold.
Will the proposed rules reduce foreign appetite for new Indian paper? That is an unlikely outcome. FIIs are used to the concept of delivery versus payment (DVP) and may be somewhat uncomfortable paying up so many days in advance; the process is far quicker in a Qualified Institutional Placement (QIP) because it involves only a few big investors. However, if the quality of the IPO is good, foreign investors will learn to live with the changed rules and there will be no dearth of takers. What Sebi needs to do is to ensure that allotments are made as quickly as possible and that very few refund cheques need to be couriered. Perhaps mutual funds too could be given an ASBA facility. The ideal situation of course is to be able to have an electronic mechanism for the entire process, but that could be some time away.
