Overseas funds seek relaxations in IPO payment rules from Sebi

Current framework restrictive, impacting capital allocation, FPIs tell regulator

Overseas funds have sought relaxations in initial public offering (IPO) payment rules from the Securities and Exchange Board of India (Sebi). Foreign portfolio investors (FPIs) want the markets regulator to allow them to apply for IPOs, with a margin payment of 10-25 per cent, said people in the know.

Sources said officials representing overseas investors have told the regulator that the current framework is restrictive, limits their capital allocation, and exposes them to greater foreign exchange risk.

At present, all investors, including FPIs, are required to have the full application amount in their bank at the time of applying for IPO. Often, this amount is 100x more than the actual allotment they get. In case of FPIs, this requires hedging and frequent repatriation of funds, pushing up their cost of investing.

For instance, this year’s largest IPOs Zomato and Nykaa were subscribed over 50x and 90x, respectively, in the qualified institutional buyer (QIB) category. Simply put, an FPI who applied for shares worth Rs 900 crore in Nykaa IPO would get an allotment for just Rs 10 crore.

“Margin funding for IPOs is allowed in many jurisdictions. It is a more realistic approach since the actual allotment is often only a fraction of the allotment amount. FPIs have told Sebi that the Indian rules are impacting their capital allocation strategies,” said a person privy to the development.

If allowed, overseas funds will have to bring in only a fraction of application amount at the time of IPO. The balance amount will be required to be paid once the allocation is finalised.

FPI demand is seen critical at a time when several mega IPOs, including that of state-owned Life Insurance Corporation (LIC) of India, are expected to hit the market over the next three to six months. Experts said allowing margin funding to all QIBs could help reduce secondary market volatility, especially when many IPOs get bunched up together.

“With the IPO wave on the rise and a formidable line-up of impending IPOs staged to hit the Indian markets in the next few months, we are seeing a lot of traction from FPIs. Under the current bidding system, investor funds (commensurate to their bids) are blocked till the time of allotment, which, in turn, create liquidity issues for investors, especially during times when the capital markets are burgeoning, and considering only a portion of the bid quantity gets allotted eventually,” said Gaurav Mistry, associate partner, DSK Legal.

Industry experts say allowing margin funding could lead to other intended consequences.

“While the demand makes sense, it could lead to other problems. Successful IPOs could see greater oversubscription and unsuccessful ones could increase the possibility of defaults,” said an investment banker.

During the 2007-08 IPO boom, investors were allowed to apply with just 10 per cent margin. The system was discontinued after the markets regulator introduced the so-called ASBA (Application Supported by Blocked Amount). Under this, the IPO application amount remains blocked in the investor’s bank account till the actual allotment is made.

“While it seems FPIs are looking at Sebi to provide some respite by permitting them to make only a part payment for their bids, it would be difficult for Sebi to provide leeway to a single category of investors,” said Mistry.

If allowed, he said, “it will be imperative to have adequate safeguards in place to assuage concerns in relation to payment delays or defaults.”

Market watchers said Sebi would be averse to the idea since the current system is working fine. However, the regulator might have to consider the demand in a new light — even the record mobilisations taking place by way of public offerings.

Funds raised via IPOs are nearing Rs 1 trillion this year. The number is expected to be even higher if LIC and other start-up IPOs materialise.