The Hindu Business Line : Raising the retail stake

SEBI's MOVE TO raise the level of retail investor participatation in equity offers is indeed a welcome development. With a number of companies planning to take the Initial Public Offering route and listed companies also raising funds through an offering of equity shares, the changes in the regulatory framework could not have come up at a more appropriate time from a retail investor perspective. The move to raise the investment limit that defined a retail investor to Rs 1 lakh has created more leeway for the individual. Thus far, any investment in excess of Rs 50,000 was categorised `non-institutional investors' and an individual had to compete even with companies in this set. As a result, the chances of securing an allotment were lower. Given the pricing levels of several IPOs and the seasoned equity offers over the past two years, the earlier limit thus allowed an investor to apply for just a little over 100 shares; the allotment would be a for a substantially lower number if the issue had attracted massive retail response. The Rs 1-lakh limit provides for flexibility in planning an investment in an IPO.

By also enhancing the limit for the retail investor by ten percentage points to 35 per cent of the offer size, SEBI has created room for a higher degree of retail participation through the primary market route. With just about 2 per cent of household savings flowing into equity, the liberalised norms may create higher interest in equity. Over the past six months, the bullish undertone in the market has led to stiff pricing of equity offers. Much as SEBI's proposals favour the retail investor, the latter must alsoexercise a higher degree of caution in the investment decision. By smartly tweaking the sub-limits for different classes of investors, SEBI has managed to ensure that the degree of participation by institutional investors in equity offers through the book-building route remains unaltered. This ensures checks-and-balances to the book-building process, brought by such investors who are expected to have better and more information about the company, and are better able to evaluate the pricing.

Listed companies will now have the flexibility to fix the price band or the floor price at least a day before the opening of the bidding. This should benefit retail investors too, as it would force them to evaluate an offer with a sharper focus on market price trends. But SEBI could consider checks to ensure that prices are not ramped up ahead of the day on which the price is fixed; the recent trends in prices of stocks of companies that came up with public offers should give it the hint. The reduction by three days in the period for which the bidding may be kept open would hasten the process of completion of allotment and listing formalities. For this to be effective, SEBI could also consider imposing a similar reduction in the overall time limit for the entire issue process. Stock exchanges are now required to disclose bidding patterns for at least three days after the close of the offer. SEBI should require them to maintain such information permanently on their web sites for analysis of investor behaviour; they should also be required to provide a summary of the offer opening and closing dates. Now, one has to rely on advertisements and that could easily be missed.

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