Sebi proposes minimum price band for IPOs, sub-categorisation of NIIs

Markets regulator Sebi on Monday proposed a minimum price band of 5 per cent for public issues through book built process and sub-categorisation of non-institutional investors.

Sebi has invited comments on its proposals in a consultation paper for review of price band and book building framework for public issues. The comments can be submitted till October 20, 2021.

The recommendations came as Sebi observed that the price band provided by issuer companies on the main board are extremely narrow.

Several concerns were deliberated upon by the Primary Market Advisory Committee (PMAC).

"The objective of fair and transparent price discovery mechanism in a book built issue appears to have been diluted over time due to evolving market practices," it said.

Narrow price band presents an opportunity to an issuer company to camouflage a fixed price issue as book built issue, thus circumventing the conditions / regulations attached to the fixed price method especially related to allocation methodology, it added.

PMAC recommended that a minimum price band in case of all public issues through book built process may be set at 5 per cent. This would mean that the upper price shall be at least 5 per cent more than the floor price.

Sebi has also asked if there is a need for minimum price band in public issues and if so, what should it be.

As per Issue of Capital and Disclosure Requirements norms, an initial public offering (IPO) can be made through two methods -- book building or fixed price method.

In case of book building method, the issuer provides a price band wherein the upper end should not be higher by more than 20 per cent of the floor price.

Sebi also expressed concerns with respect to the current methodology of proportionate allotment to non-institutional investors (NIIs), which carries a certain risk where very large applications by few NIIs results in crowding out of other NIIs.

The regulator analysed oversubscribed IPOs during January 2018 - April 2021 and observed that in 29 IPOs, on an average around 60 per cent applicants in the NII category did not get any allotment.

"It is expected that any public offering should aim to provide as diverse offering as possible with equitable opportunity at retail and non- institutional level," Sebi said.

Since smaller NIIs are getting crowded out, the committee proposed sub-categorisation of NIIs into two categories.

In the first sub-category, one-third of the allocation earmarked for NIIs shall be for application sizes in the range of above Rs 2 lakh and up to Rs 10 lakh.

For the second sub-category, it has proposed that two-thirds of the allocation earmarked for NIIs be for applications above Rs 10 lakh.

"Further, proportionate allotment in case of NII category may be discontinued and draw of lots allotment to be introduced, as is currently applicable for RII category," as per the committee's proposal.

RIIs refer to retail individual investors.