SEBI, the Securities and Exchange Board of India, has recently unveiled proposed changes to the rules governing Main Board Initial Public Offerings (IPOs). While previous discussions focused on SME IPOs, these new updates specifically target Main Board IPOs and could have significant implications for retail investors. This article delves into the details of these proposed changes, their rationale, and the potential impact on individual investors.
Understanding SEBI’s IPO Rule Change Process
When SEBI proposes any changes to IPO rules, a structured process is typically followed. Initially, SEBI invites public opinion on the proposed modifications through a consultation paper. After gathering feedback, a thorough audit is conducted. Only after this comprehensive review process are the final changes to IPO rules generally implemented. For the current proposed changes, a deadline of August 21st has been set for submitting public opinions. Following this, if no substantial reform-related updates emerge, SEBI may issue a circular formalizing the current proposals.
Key Proposed Changes to Main Board IPO Allocation
The primary change proposed by SEBI aims to enhance listing stability by adjusting the allocation percentages, particularly for larger IPOs. Specifically, for IPOs with an issue size exceeding INR 5,000 crore, the following allocation adjustments are being considered:
- Retail Investor Portion: Currently, retail investors are allocated up to 35% of the total issue size. SEBI proposes to reduce this to 25%. For instance, in a large IPO of INR 10,000 crore, where retail investors previously received shares worth approximately INR 3,500 crore, this would be reduced to INR 2,500 crore.
- Qualified Institutional Buyer (QIB) Portion: The allocation for QIBs is set to increase from the current 50% to 60% of the total issue size.
- High Net Worth Individual (HNI) Portion: The allocation for HNIs is expected to remain unchanged at 15%.
These proportional changes will apply to large IPOs exceeding INR 5,000 crore, aiming to rebalance the investor base.
Why is SEBI Proposing These Changes?
SEBI’s proposal is driven by a desire to bring more stability to IPO listings and address observed trends in large public offerings. The key reasons include:
- Listing Stability: Retail investors are often seen to exert higher selling pressure shortly after listing, potentially leading to panic and price drops. By reducing retail allocation and increasing QIB allocation, SEBI aims to mitigate this immediate selling pressure and promote more stable listing performances.
- Retail Under-subscription in Large IPOs: Past large IPOs have shown that retail investors sometimes do not fully subscribe to their allocated portion, even at 35%. Examples include:
- Hyundai Motors IPO (INR 27,000 crore issue size): Retail subscription was only 0.4x (40%).
- Hexaware Technology IPO (over INR 8,000 crore issue size): Retail subscription was merely 10%.
- AFCONS Infrastructure IPO (INR 5,400 crore issue size): Retail subscription reached approximately 0.9x (90%). Such under-subscription figures indicate that a significant portion reserved for retail investors often goes unutilized in very large issues.
- Encouraging Long-Term Investment: QIBs, typically large institutional investors, tend to invest for the long term (e.g., six months to a year or more) based on company performance and future expectations. Increasing their allocation aims to attract such stable, long-term capital, thereby strengthening the company’s investor base. There are also plans to allocate more shares to mutual funds through this flexible retail allocation framework.
Timeline for Implementation
The public opinion window for these changes is open until August 21st. Following this, SEBI is expected to review the feedback. A circular detailing the final rules could be released by September, with implementation potentially occurring by October or November.
What This Means for Retail Investors
From a retail investor’s perspective, these proposed changes are largely perceived as “bad news,” particularly for highly anticipated and good-quality IPOs:
- Reduced Allotment Chances: With the retail portion shrinking from 35% to 25% in large IPOs, the overall pool of shares available for retail investors will decrease. This will inevitably make it even more challenging to secure an allotment, especially for popular IPOs that are heavily oversubscribed.
- Increased Competition: In well-known IPOs from reputable groups, where issue sizes may double the INR 5,000 crore threshold, the competition for the reduced 25% retail allocation will intensify significantly.
- Strategy for Allotment: To potentially increase allotment chances in the future, retail investors might need to apply for one lot from multiple demat accounts associated with different family members or funds.
While the reduction in retail allocation might protect investors from getting stuck in underperforming IPOs by making fewer shares available, the direct impact on accessing attractive IPOs is seen as negative due to the diminished likelihood of receiving an allotment. Investors are encouraged to share their opinions on these proposed changes with SEBI.
