Institutional participation must for IPOs, says Sebi

Disallows spill-over from retail to QIB category

Capital market regulator Securities and Exchange Board of India (Sebi) has said spill-over from retail category to qualified institutional buyers (QIBs) category in initial public offerings (IPOs) won't be permitted.

In other words, any public offering will need compulsory participation from QIBs, which among others includes foreign institutional investors (FIIs), mutual funds and insurance companies.

The move was prompted after a lot of IPOs, last year, saw zero participation from institutional investors and where filled only on the back of retail subscription. Incidentally, some of these IPOs were later banned by the market regulator for irregularities and violation of norms.

According to legal experts tracking capital markets, Sebi has now clubbed the QIB and non-institutional investor category, or commonly known as HNI category, into one bucket and has said that spill-over from retail will not be allowed into this bucket. In other words, if an IPO fails to generate a minimum 65 per cent demand for QIBs and HNIs, either the issue will have to be withdrawn or will have to be underwritten by the merchant bankers.

This new norm comes into effect after Sebi amended the Issue of Capital and Disclosure Requirements (ICDR) on October 12.

As per earlier rules, spill-over from one category to another was permitted to the extent of under-subscription in that category.

Last year, at least four IPOs had seen no bids from QIBs and the issues managed to sail through just on the back of oversubscription in the retail segment.

Market expert said the decision to not allow spill-over from retail to QIB, will help reduce manipulation. Retail category, they say, can be easily manipulated with fake applications; however, QIBs applications mostly are genuine.

“QIBs are considered to be more sophisticated investors and are known to have the wherewithal. If they abstain completely from an IPO, something may not be right with the issue,” said a senior official in charge of IPO distribution with a domestic merchant bank, who is not authorised to be quoted.

For IPOs made the book building process, 35 per cent of the net offer is reserved for QIBs. Up to 15 per cent is meant for HNIs or corporates who bid for more than Rs 2 lakh. While the remaining 50 per cent is reserved for retail investors, which are individual investors who invest up to Rs 2 lakh.

As reported earlier, Sebi has also redesigned the profitability criteria for companies wanting to tap the capital market. Corporates will need to have a minimum average pre-tax operating profit of Rs 15 crore in three of preceding five years. If companies fail to meet this criterion they will need an increased QIB participation of 75 per cent as against the existing 50 per cent in IPOs or will have list on the SME platform.