BS Number Wise: When Sebi tries to ensure you get a piece of that hot IPO

Have you tried to get shares in a coveted company coming to the market for the first time? Have you experienced the disappointment of not getting an allotment? The Securities and Exchange Board of India (Sebi) is attempting to come to your rescue. The stock market regulator has looked at a way to ensure that you get some shares through a rule tweak in a recent consultation paper. An analysis of some trends in other markets suggests that it could be swimming against the tide.

First, let’s look at what’s happened. Companies have gone big on selling shares to the public for the first time through initial public offers (IPOs) since the pandemic began. Rules reserve a certain portion of shares for retail and non-institutional investors which can be allocated to other applicants only if no one bids for them. Retail investors are those who bid for shares worth up to Rs.200,000. Bids over the Rs.200,000 threshold fall under the non-institutional investor category. Wealthy high networth individuals (HNIs) often account for the bulk of bids under this category.

There were Rs.51,979 crore worth of shares that companies sold through IPOs in the ongoing financial year. They received bids worth Rs.10.3 trillion or 19.9 times the value of shares being offered. High networth individuals accounted for a significant part of this bidding as seen in chart 1 (click image for interactive link).

The regulator found that oversubscriptions have often crowded out those on the lower side of bids of over Rs 200,000. It has suggested reserving one-third of the non-institutional investor quota for those investing between Rs 0.2-1 million, so that they are not crowded out by moneybags bidding far larger amounts. Conversations with market experts suggest that much of the money invested is borrowed. Wealthy individuals invest borrowed money to make a profit on companies expected to rise after listing. The incentive for this seems to be going up when interest rates decline because of lower borrowing costs (chart 2).

Reservations for individuals were seen to bring in new investors to the market. However, retail investors often burn their fingers in IPOs. Additionally, wider equity ownership has happened increasingly through institutional means (like mutual funds) in other markets. Trends over roughly 50 years show individual ownership going down in favour of institutional ownership (chart 3).

Institutions because of size and organisational advantages are often considered able to better assert their rights as shareholders. Institutional investors’ stake has risen from 62.39 per cent by value of India’s publicly available shares (or free float) in June 2009, to 70.35 per cent in June 2021. Individual shareholding has dropped from 19.66 per cent to 18.74 per cent (chart 4).

This could mean that institutional shareholders are the dominant providers of equity capital going forward. Such ownership can have its own challenges such as a bias towards large listed firms. But a debate on at what point individual quotas will have outlived their utility in an increasingly institutionalised market, may well be worth having.