The Hindu Business Line : IPOs: Govt plans separate books for institutional, retail buyers

IN what could lead to a major change in the book-building process for IPOs, the Ministry of Finance and the SEBI are considering a proposal to have separate books for qualified institutional buyers (QIBs) on one hand and non-institutional investors (NIIs) and retail individual investors (RIIs) on the other.

This is among many measures being contemplated to improve the current structure of book-built offers including replacing the discretionary quota system for allotment to QIBs with proportionate allotment and seeking payment of margin by institutional buyers.

"Having separate books for QIBs and the rest of the bidders is one of the options," a senior Finance Ministry official told Business Line. However, details of the proposal were not available.

Currently, the bids of all three categories of investors - QIBs, NIIs and RIIs - are part of a single book-building process.

Through book-building, an issuer arrives at the final price (out of the price band) at which the shares on offer would be allotted to the successful bidders.

Having separate books could help in getting rid of the trend of announcement of bloated, and often misleading, oversubscription figures that are raked up through heavy bidding on the part of QIBs.

Unlike NIIs and RIIs, QIBs are currently not required to sign a cheque to back up their bids.

This leads them to put in large bids which often comes as a follow-up to a commitment made to the issuer or the lead mangers before the opening of the issue. The heavy oversubscription figure gives an impression of massive appetite for the stock, which eventually lures retail investors in droves towards the issue.

Most retail bids are then made at the "cut-off" price in fear of missing out on allotment if the eventual price fixed is higher than the bid. This is believed to distort the price discovery mechanism with virtually all issues now being eventually priced at the highest end of the price band.

QIBs include several categories of institutional investors with enormous financial muscle and capital market expertise such as public financial institutions, commercial banks, mutual funds, FIIs, venture capital funds, pension funds, and insurance companies.

On the other hand, retail investors are those who put in application for shares for the aggregate value of Rs 1 lakh.

Investors that do not fall in the QIB or retail category constitute the category of non-institutional investors. As per existing regulations, the allocation of shares to QIBs, NIIs and RIIs has to be in the ratio of 50:15:35 respectively.

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