Pay retail investors for failure in IPO allotment: Sebi tells bankers

Investment bankers handling initial public offerings (IPOs) will have to compensate retail investors —those investing up to Rs 200,000—if they fail to get an allotment due to mishandling. In a circular released on Thursday, the market regulator directed banks to provide compensation to investors if any failure on their part results in non-allotment of shares to retail applicants.

“…there have been instances where the applicants in an IPO have failed to get allotment and in the process may have suffered an opportunity loss,” Sebi said in a circular.

The regulator said there have been several instances where an investor has missed out on allotment due to failure on part of the bank to make bids in the concerned exchange system even after the  amount has been blocked in the investors’ bank account.

Sebi has issued a formula for compensation, which takes into consideration the difference between the issue price and the listing price. It formula also considers probability of allotment, depending on the subscription that an IPO generates.

Under the Sebi formula, if the IPO is hugely oversubscribed, the compensation amount reduces. 

If the issue lists at a discount, the retail investors won’t get any compensation. 

Sebi has said IPO applicants who miss out on allotment due to failure on the part of the investment bank can seek redressal of the same within three months of the listing date. The regulator said the bank concerned will have to resolve the issue within 15 days or pay interest at the rate of 15% per annum for any delay.

Investment bankers said the compensation framework would put pressure on them.

“The fee we earn is miniscule compared to the efforts we have to put in to upload thousands of applications within a short time. The penal action will further put us under pressure. It could lead to losses and litigation, making the whole exercise counterproductive,” said an official with an investment bank.