Should the margin money paid by QIBs be raised?

DEBATE

There is the issue of a level playing field since Qualified Institutional Buyers pay a tenth of what the others do as well as the possibility of this driving up bids

S Subramanian,
Head, Investment Banking,
Enam Financial Consultants

Retail investors look to QIBs for guidance "" anything that lowers their participation will hit this. Unlike others, QIBs can't withdraw after an IPO closes

It is heartening to see that some of the recent offerings by Indian companies have been significantly over-subscribed by all categories of investors "" retail investors, non-institutional bidders and qualified institutional buyers (QIBs). One of the outcomes of this unqualified success of initial public offerings (IPOs) is the demand that the margin money paid by QIBs be increased to 100 per cent from the current rate of 10 per cent and bring them on par with the margin money paid by retail and non-institutional investors.

We would argue against any move to increase margin on QIB bids to 100 per cent. And our recommendation is based on the following factors.

First, in many instances, the success of an IPO is based on a minimum level of participation by the QIBs. The regulator clearly recognises the pivotal role played by the QIBs in signaling the success of an IPO.

By coming in early the QIBs indicate to the retail bidders the amount and quality of demand in the IPOs and implicitly signaling the success of the IPO. The retail investors, therefore, look to the institutional bids (QIBs) for their guidance. If we increase the margin money on QIB applications, we incentivise them to come in on the last day and, thereby, deny retail bidders the timely signaling benefit that early institutional bids provide.

Second, QIBs are none other than representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes. Therefore, in many cases the benefits actually accrue to retail investors.

Third, QIBs are prohibited by Sebi guidelines to withdraw their bids after the close of the IPOs. Retail and non-institutional bidders are permitted to withdraw their bids until the day of allotment. Allotment of shares typically happens between the 10th and the 13th day after the close of an IPO. Therefore, retail and non-institutional bidders have the luxury of withdrawing their bids based on market movements. There have been innumerable instances where both retail and non-institutional bidders have exercised such an opportunity. QIBs are denied this flexibility and are thus exposed to an additional two weeks of market volatility as compared to other categories of investors. Such special responsibility must be accompanied by some privileges. Reduced margins on IPO applications is one such privilege.

Finally, I believe we must pose the question differently. We must ask the following question: "What should be done so that retail and non-institutional bidders could also have their margins slashed to 10 per cent?" I believe making institutional investors pay 100 per cent margin on application amount is answering the wrong questions. We need to decrease the time between the closure of the bids and the allotment of shares and the time between the allotment of shares and listing. The primary markets division and the primary markets committee of Sebi are actively considering proposals to this achieve this reduction in time between the closure of an IPO and its listing. We believe that will provide a fitting solution to the problem headlined above.

Motilal Oswal,
CMD,
Motilal Oswal Financial Services

Higher leverage allows QIBs to bid aggressively and this distorts price signals. And now that we don't need dollars, special treatment for FIIs is no longer needed

If we were to look at the data pertaining to the top 10 initial public offerings (by size) in the year 2007, we would find that they were cumulatively subscribed more than 50 times. A closer look would reveal that the subscription by the qualified institutional buyers (QIBs) was far higher at 82 times. However, retail and non-institutional investors were able to subscribe just 13 times of their entitlement.

This phenomenon is not because retail and non-institutional investors are less enthusiastic about investing in primary issues. One of the primary reasons for such difference between subscriptions under these categories is the margin money required to pay while bidding for shares in IPOs. While retail and non-institutional investors are required to pay 100 per cent money upfront when they bid for shares in an IPO, the QIBs are allowed to bid by paying only 10 per cent of the application amount. This leveraged advantage given to QIBs helps them to bid far more aggressively than others.

The QIBs, in their desire to secure maximum allotment, collectively bid for disproportionately higher number of shares in relation to those on offer, as they are required to pay only 10 per cent money upfront. Such bidding process has a twin effect of skewing the response pattern to the offer and influencing the pricing decision. When the number of shares bid for at the upper end of the price band exceeds those on offer, there is a temptation to price the IPO at higher level.

Though among these investors, the long-term investors never look for listing gains anyway, and they are not going to be disturbed by a low listing price. But the category of non-serious bidders end up skewing the picture as they put in disproportionately high bids to maximise their shorter-term gains.

A yet another perspective to this issue is that all this while, we required dollar inflows desperately and hence there was a need for preferential treatment to FIIs. But now that we want to moderate the foreign inflows "" thanks to our burgeoning foreign reserves and a strong economy "" a greater level playing field is desired amongst participants.

The other recent changes in IPO regulations announced by the Securities and Exchange Board of India (Sebi) take the IPO process another step towards being transparent, equitable and investor-friendly. The move towards allowing allotments under the category of QIBs comprising foreign institutional investors, domestic institutions and mutual funds to be made on a proportionate basis, was certainly commendable. Before such move by Sebi, the merchant bankers to the offer made allotments to these QIB investors on a discretionary basis. Hence, this move would bring all investors on par as far as allotment is concerned, that is, on a proportionate basis.

Therefore, in my opinion the time has come for us to move to the next level by giving equitable opportunity to all investors. We should consider offering the same level playing field to all investors with respect to the upfront bidding amount. The aftermath of this effect would certainly be perceived as a better, fairer and transparent system.