Many of you may have witnessed that, since the last couple of years the Indian equity markets have typically moving in a range and there’s been a lull in the Indian equity markets. But interestingly, retail investors have been the only ones who in the thirst for faster wealth creation (through listing gains), have evinced interest in the Initial Public Offerings (IPOs). For instance, last year at least four IPOs had seen zero participation from Qualified Institutional Buyers (QIBs) – which includes foreign institutional investors (FIIs), mutual funds and insurance companies, amongst others; and the issues have managed to sail through just on the back of oversubscription from the retail category. Incidentally, some of these IPOs were later banned by the capital market regulator - the Securities and Exchange Board of India (SEBI) for irregularities and violation of norms.
But now being concerned over this zero participation from QIBs, SEBI has said spill-over from the retail category to the QIB category in IPOs will not be permitted.
In other words to simply put, now any IPO will need compulsory participation from QIBs, whereby if an IPO fails to generate a minimum 65% demand for QIBs and High Networth Individuals (HNIs) (i.e. those who bid in an IPO for shares over Rs 2 lakh), either the issue will have to be withdrawn or will have to be underwritten by merchant bankers. Thus SEBI, now through this move has tried to club QIBs and HNI category together into one bucket, and said that spill-over from retail category (i.e. those who bid for shares upto a sum of Rs 2 lakh), will not be allowed in this bucket. This new norm comes into effect after SEBI amended the Issue of Capital and Disclosure Requirements (ICDR) on October 12.
It is noteworthy that earlier, spill-over from one category to another was permitted to the extent of under-subscription in that category.
We are of the view that, QIBs are sophisticated investors who are known to be well-versed and resourceful while tapping opportunities in the primary as well as secondary market. Hence making their participation compulsory in an IPO could add to the confidence of retail investor to a public issue as well. If they are abstaining completely from an IPO, could indicate that something may not be right with the issue. Moreover, the decision not to allow spill-over from the retail category to the QIB category could help reduce manipulations, as dominance by the retail category in an issue, exposes to the risk of fake applications.
Also with SEBI redesigning profitability criteria for companies wanting to tap the capital markets, wherein companies will have to suffice to the minimum average pre-tax operating profit of Rs 15 crore in three of the preceding five years, is again in the interest of investors at large.