IPO benefit for retail investors

Last Monday, the Securities and Exchange Board of India (Sebi) announced that retail investors being allotted shares at a discount in initial public offerings (IPOs) should be allowed to apply at the discounted price rather than the cut-off price. From June 15, the changes would apply to all public offer documents filed with the Register of Companies.

The direct impact will be that retail investors will find it more lucrative to invest in IPOs, as they can be allotted more shares without crossing the Rs 2-lakh limit. For instance, say the price band for a particular issue is Rs 100-200 and the retail investors are given a 10 per cent discount. The investor can now bid for the shares at Rs 180, after calculating the discount at the upper end of the price band.

You can also bid for a greater number of shares. According to Sebi guidelines, IPO applications with the total value of shares bid at Rs 2 lakh or less, would be classified under the retail category. With the earlier guidelines, at Rs 200, you could have bid for a maximum of 1,000 shares. In comparison, under the new norms, at Rs 180, you can get 1,111 shares.

Sebi’s recent announcement assumes significance in the wake of big ticket PSU divestments planned for this financial year. Public sector primary market issuances give discounts to retail investors. This will help them garner more shares of good PSUs. The coming months could see the government diluting its stake in big companies, including ONGC, SAIL and Hindustan Copper.

Market players say Sebi’s announcement could increase the number of retail applications in an IPO. Also, they can enjoy a price advantage over high networth individuals and institutional bidders.

This development, along with an increase in the investment limit for retail investors to Rs 2 lakh, is an attempt to increase investor interest in stock market. Retail investors have been absent from both the secondary and primary markets for some time, thanks to the huge volatility the market has experienced.

The last public issue to see good retail participation was that of Coal India. Retail investors bid for 44.6 crore shares, as against the 20 crore shares on offer. There were more than 17.5 lakh retail applications for the Rs 15,000-crore issue. A month before the issue opened, the number of new demat accounts opened rose by 10 per cent.