The Securities and Exchange Board of India (SEBI) has doubled the limit for maximum application for individual investors from Rs 1 lakh to Rs 2 lakhs across all public issues. However, there is no increase in the percentage allocation. This helps investors invest over Rs 1 lakh in an initial public offer (IPO). The market regulator, SEBI, has permitted all investors who apply in public offers for shares worth Rs 2 lakhs or less to be treated as retail investors.
Till now, in public offers, applications above Rs 1 lakh were categorised under the high net worth individual (HNI) segment, where an investor could not get the benefit of a five percent discount reserved for retail investors. Besides, once categorised as HNIs these investors had only 15 percent of the shares at their disposal, as against 35 percent reserved for the retail players. The remaining 50 percent is set aside for institutional investors. Usually, the HNI and institutional parts are subscribed much more that the retail part, so the chances of getting allotment if one applies under the retail category is much higher than in the other two.
Some time ago, SEBI had issued a discussion paper for proposed changes to SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, proposing the increase in the limit to Rs 2 lakhs. SEBI had observed that the limit of Rs 1 lakh to define a retail individual investor needs to be enhanced. It had been observed that in the recent public offerings, approximately 75 percent of applications in the retail individual investor category have come in the size of Rs 80,000 to Rs 1 lakh.
In the non-institutional investor category, the number of applications in the size of less than Rs 5 lakhs is negligible. This suggests that retail individual investors who have the capacity and appetite to apply for securities worth above Rs 1 lakh were constrained from doing so because of the Rs 1 lakh limit. They could not make an application under the non-institutional investor category because the allocation there is limited to 15 percent as against 35 percent for retail individual investor category.
Another argument in favor of the upward revision is that the rate of inflation has also more than doubled since 2005, when the rate was around four percent.
Under the ICDR Regulations, since 35 percent of the public issue is to be allocated to retail individual investors, in a largesized public issue – for an issue size of Rs 4,000 crores to Rs 6,000 crores – the limit of Rs 1 lakh would mean the issue has to receive a minimum of 1.5-2 lakh applications from retail individual investors to fill in the 35 percent allocation. This could be a daunting task considering that in case of well oversubscribed issues, the number of applications received from retail individual investors was in the range of 35,000 to 70,000.
The present move will have several positive outcomes for public offers. From now on all investors applying for shares worth up to Rs 2 lakhs will be eligible to get shares at up to five percent discount. This will also lead to broader retail investor base for companies. In addition, the chances of the retail part in an offer getting over-subscribed could also go up. The new enhanced limit will allow more investors to enter the market as retail players and thus avail the price discount for the segment.
Retail investors will get to double their chances in initial public offerings. This is the first revision in five years, attempting to keep pace with the eroding value of the rupee.

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