No use tweaking definitions and limits, new policy needed
By itself the proposal of the Securities and Exchange Board of India (Sebi) to enhance the limit for “defining retail individual investors (RIIs)” in public issues from 1,00,000 to 2,00,000 cannot be faulted. But the rationale proffered is weak, the objective foggy and the arguments are both a “dicto simpliciter” as well as a “non-sequiter”. Without speculating about the reasons that prompted Sebi to issue the discussion paper and treating it on its merits, the proposal seems to stem from an underlying belief stated in the paper that the RIIs have the “capacity and appetite” to apply for securities worth more than 1,00,000 but the existing limit has been constraining them. The obvious corollary would be that a measure as simple as the enhancement of the limit would allow the investors to maximise the use of their “capacity” and whet their so-called “appetite” which was hitherto not satiated. While enhancing the limit for a retail investor is good by itself because it does not make sense to artificially define smallness, it does not necessarily follow that one thing will lead to the other and that as soon as the limit is raised scores of investors will throng the gates for every initial public offer (IPO). An analysis of retail subscriptions in the IPOs over the last three years does not bear this out.
If lacklustre response, as judged by the oversubscription multiples, is a cause for worry, then one has to look for reasons elsewhere. Factors such as aggressive pricing of IPOs in good times and the consequent high PE ratios reducing the scope of post-listing price discovery, the sullenness of the secondary market and sudden bouts of volatility following the periods of entry and withdrawal by foreign institutional investors (FIIs), who seem to be the movers and shakers of the Indian market, make the retail investor uncertain, weary and cautious. The so-called “capacity and appetite” of the RIIs that Sebi talks about is actually missing in reality. Sebi has sought to redefine the investment limits of this “individual investor” on a number of occasions. The limited impact of these measures on the fortunes of the primary market is evidence enough that playing with the limits and definitions, while enabling the individual investor to invest more, has never been a requirement buoyancy of the primary market.
Piecemeal regulatory measures may at times be necessary to tweak the regulatory architecture to meet the demands of a dynamic securities market. But sometimes big-ticket reforms are needed. The primary market has been in need of one for a long time. There are two places where this could begin — one is the structure of the primary market. Despite the ad nauseum protestations that “small investors are the backbone of the securities market”, the primary and secondary markets have become less individual investor-dependent and mutual funds have been conspicuous by their feeble presence. The question is, should this continue to be so? The other area is the number of classes in which the investors have been segregated, with each class having different rights in a public issue. This segregation leads to inefficiency, increases the issue cost and influences the structuring of a public issue. It’s time that the underlying dominant logic is re-examined and artificial investor castes are abolished.