Retail push

The decision of the Securities and Exchange Board of India to raise the proportion of public offers reserved for retail investors is welcome. Investor interest in IPOs has been strong, thanks not only to the fact that the market was extremely buoyant till recently, but also because the quality of some of the new issues has been good.

The only reason retail investors have been reluctant to apply for IPOs was because they felt that they had few chances of obtaining a decent allotment. Now that the proportion reserved for retail investors has been increased from 25 per cent to 35 per cent, this grouse need not be a deterrent.

Sebi has also doubled the investment limit for retail investors to Rs 1 lakh, making it easier for them to obtain a fair share of the cake. Given the high prices of some recent issues, the earlier Rs 50,000 limit was proving to be very restrictive.

These moves are also important from a longer-term perspective. The proportion of household savings invested in the stockmarket is not only minuscule, but also lower than the proportion invested in stocks before the liberalisation of the markets.

A series of scams has undermined the confidence of retail investors, with the result that they have missed out on the bull run of the last couple of years. The changes made by Sebi will hopefully coax the small investor back to the primary market.

There are several collateral benefits, too. For instance, it is well known that many investors tender multiple applications in the hope of obtaining allotments. The incentive to do so will now diminish once investors can invest up to Rs 1 lakh under the retail category.

The other benefit is that some of the post-listing volatility in IPOs may be reduced. From an analysis of book-built issues, Sebi had observed that non-institutional investors, or high net worth individuals, borrow heavily for subscribing to IPOs.

As soon as an issue is listed, they sell and book profits. Reducing the proportion reserved for the high net worth category will, therefore, reduce this speculative element in IPOs and make for a more stable aftermarket.

Another decision, to reduce the bidding period, will help deflate some of the hype surrounding new issues. In most cases, an oversubscription of issues is not difficult to arrange, given the fact that Qualified Institutional Buyers do not have to put up any money upfront.

Allocations in the QIB category are also entirely in the hands of the book-running lead managers. This oversubscription is frequently tom-tommed in the media, the object being to lure genuine investors to bid for the issue. Reducing the bidding period, improving the contents of the bidding data being displayed, and ensuring data uniformity across stock exchanges should help reduce some of the hype and improve transparency.

Sebi's move to allow listed issuers to disclose the price band only a day before the opening of bids doesn't really matter much because investors, in any case, have price guidance from the market in respect of secondary issues.

Nevertheless, these measures should collectively help improve the IPO market. Of course, much will depend on how Sebi is able to tackle manipulation in IPOs. Circumstantial evidence suggests that the prices of some scrips were ramped up prior to the pricing of an issue. Sebi clearly needs to keep a closer watch on such hanky-panky.