UPI limit hike signals change in IPO allotment, to boost HNI participation

The Reserve Bank of India (RBI) on Wednesday announced that the transaction limit on the unified payment interface (UPI) for investing in initial public offerings (IPOs) will be increased from Rs 2 lakh at present to Rs 5 lakh, a move seen as a precursor to changes in the IPO allotment process.

At present, the maximum an individual investor can apply under the retail quota of an IPO is Rs 2 lakh — the same as the upper limit for UPI transactions. As a result, prima facie, the RBI’s increased limit is not seen benefiting individual investors.

However, the Securities and Exchange Board of India (Sebi) is working on changes to the IPO allotment process to boost the participation of investors in the high networth individual (HNI) category.

In a consultation paper released on October 4, the markets regulator had proposed a carving out a separate category within HNIs to safeguard the interests of those who submit relatively lower bids. Sebi has said there can be a special category for those investing between Rs 2 lakh and Rs 10 lakh in the HNI portion, which is currently dominated by those placing leveraged bids worth crores.

“[This] is a clear indication that Sebi’s proposal to tweak the IPO allotment process has reached the approval stage. Allowing UPI transactions of up to Rs 5 lakh is aimed at those who would invest in the HNI category,” said an investment banker, adding that the changes could take effect before the mega-IPO of state-owned Life Insurance Corporation.

“The transaction limit in the UPI system was enhanced from Rs 1 lakh to Rs 2 lakh in March 2020. To further encourage the use of UPI by retail investors, it is proposed to enhance the transaction limit for payments through UPI for Retail Direct Scheme and IPO applications from Rs 2 lakh to Rs 5 lakh. Separate instructions to NPCI will be issued shortly,” the RBI said on Wednesday.

“The RBI proposal is an important step in widening the primary market investor base. By increasing the limit, the market would open to HNIs,” said Vijay Singhania, chairman, TradeSmart.

In November, more than 7.6 million UPI mandates were created for IPO applications, according to data released by the National Payments Corporation of India (NPCI), the umbrella organisation for retail payments in the country.

The record for maximum mandates created in a month was in July when it hit around 7.7 million.

Industry players say nearly 30 per cent of gross applications for IPOs come through the UPI route. A large portion of these applications get rejected due to technical factors such as multiple entry, name and PAN mismatch, and non-acceptance of payment mandate.

Apart from UPI, investors, particularly those who have an account with bank-backed brokerages, also apply through internet banking. This route currently accounts for the bulk of IPO applications.

In October, the RBI had increased the limit for immediate payment service (IMPS) from Rs 2 lakh to Rs 5 lakh. The latest proposal regarding UPI is seen as levelling the playing field.