After a long lull, there are some offerings in the primary market, albeit of a different sort, for you to participate. For instance, you can now own a part of an exchange (Multi-Commodity Exchange's initial public offering) and also in a small and medium enterprise (SME) —BCB Finance.
The initial public offer (IPO) of BCB Finance opened on February 23. It will close on February 27. There are many more on the anvil.
The rules of the game of this new investment avenue have been tweaked to make the entry of retail investors difficult. Market regulator, the Securities and Exchange Board of India (Sebi), has imposed certain restrictions. And with good reason, too. Most small companies that launched their issues in the past two years are trading well below their issue prices. The BSE IPO index has lost over 20 per cent in the last one year, while the Sensex has lost 12 per cent. Therefore, the regulator will allow only those with over Rs 1 lakh to subscribe to the issue.
| SME IPOs VS OTHERS | ||
| SME IPO | Other IPOs | |
| Minimum application | Rs 1 lakh | Rs 5,000-7,000 |
| Underwriting | The issues shall be 100% underwritten and merchant bankers shall underwrite15% in their own account | Merchant banker has to underwrite a minimum of Rs 25 lakh of the issue |
| Market making | Sebi has compulsorily mandated market making for all scrips | Not mandatory |
| Paid-up capital | Maximum of Rs 25 crore | No upper limit |
The BCB Finance issue has a fixed price of Rs 25. On offer are 35.4 lakh shares, 50 per cent of which are reserved for those applying for Rs 2 lakh worth of shares (retail investors' limit). This constitutes 17.7 lakh reserved shares. So, according to the norms, one must subscribe to a minimum of 4,000 shares and a maximum of 8,000 shares (at Rs 25 each). Even post-listing, one can only trade in lots of 4,000 shares.
In a book-building issue (or when there is a price band), the portion reserved for small investors is 35 per cent of the issue. But with Regulation 26 (which mandates companies to have reservations for different category of investors) being waived, it is not compulsory for SME IPOs to have these reservations.
The obvious question for most then is — should they take a plunge or wait and watch? To begin with, investors should look at these companies from a long-term investment view, that is, three to five years. "If these companies succeed they have the ability to even give better returns than the frontline stocks. But, since there is high amount of risk involved, limit your exposure to these stocks. As and when they grow, you could, maybe, take a call on, maybe, increasing your exposure," says Amar Ranu, senior manager (third party products), Motilal Oswal Private Wealth.
When investing in an SME IPO, there are some additional factors that you need to keep in mind. However, as the name implies, the companies in this sector are in their early stages of operations. Most investors may not understand the sector and the challenges involved. Being small-sized companies there is a risk of these going bust as funding is an issue for the sector. There is no track record of these companies and chances of these companies not succeeding are also big.
Says certified financial planner Arnav Pandya,"Finding buyers for these shares could be a problem. So, you could be stuck with the shares." Plus, there could be liquidity problems when trading in shares of small-sized companies.
But you have help on hand from the market regulator, Sebi. It has made it mandatory for the merchant bankers to the issue to make sure they are responsible for two-way quotes for trading. "This means that the market maker is obliged to find a buyer for an investors who wants to sell and vice versa," said a merchant banker with the issue. But not for the entire day, so you could face liquidity issues. It is mandatory for the merchant bankers to do the market making for at least three years. Also, do your homework on the merchant bankers. They play a huge role not only in the success of the IPO but also in the trading of the shares also. Check their track record, too.
Pandya says invest in the IPO only if you have a large portfolio and know the market well. Then, too, invest only a very small portion of your portfolio (two to five per cent).
