Retail investors will now get to subscribe more in initial public offers (IPOs). The Securities and Exchange Board of India (SEBI) has proposed to raise the investment limit for retail investors from the current Rs 1 lakh to Rs 2 lakh. The move is seen as an intermediate step before increasing the limit to Rs5 lakh and is expected to help companies obtain more retail subscriptions in IPOs. Currently, individual investors are classified as retail only if their investment is Rs1 lakh or less.
Some 35% of the amount to be raised by IPOs is reserved for retail investors, but due to the low investment limit, very often they are under subscribed.
The limit of Rs 2 lakh will increase the chances of retail investors getting allocations even in case of over subscription. Some of the forthcoming issues from government companies would be pretty large. To fill up subscriptions, they would have had to rope in more investors if the retail limit was restricted to Rs 1 lakh. Public sector companies have lined up Rs40,000 crore worth of IPOs.
According to a source, the regulator has sounded out market intermediaries raising the retail limit even further to Rs5 lakh.
“Maybe the regulator is looking to increase the limit step by step,” said the source.
According to a discussion paper released by SEBI, large-sized public issues easily require between 1.5-2 lakh applications to meet their retail quota. This is much higher than the 35-70,000 applications received from retailinvestors in recent issues. SEBI has invited comments on the discussion paper till September 3.
SEBI has also noted that in recent public offerings, approximately 75% of applications in the retail category have come in the size of Rs80,000-Rs1 lakh. The number of applications in the non-institutional category, which is used by high net worth individuals, is usually above Rs5 lakh, but retail investors avoid investing in this segment since the reservation of shares is only 15% against 35% for retail.
According to the regulator, the proposed increase in the investment limit is intended to keep pace with inflation and also the changing nature of market valuations. While inflation is close to double-digits, the market has risen over 125% since 2005. Rs1 lakh does not fetch the retail investor too many shares, given the bloat in share valuations.
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Discussion paper as issued by SEBI
Discussion Paper for proposed changes to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 – Enhancement of limit for defining Retail Individual Investors in public issues
1.0 Background:
1.1 Retail Individual Investor in a public issue was defined in the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP Guidelines) until August 2003 as under:
(i) Fixed price issue: Retail Individual Investor is one who applies for allotment equal to or less than 10 marketable lots.
(ii) Book built issue: Retail Individual Investor is one who applies for up to 1000 securities.
1.2 The aforesaid definition of Retail Individual Investor did not differentiate between profiles of different investors. e.g. a Retail Individual Investor who applies for 1000 shares of Rs.530/- each and a Retail Individual Investor who applies for 1000 shares of Rs.10/- each. It was decided to define Retail Individual Investor on the basis of amount applied for, instead of the number of shares applied for and DIP Guidelines were amended in August 2003 to provide that a Retail Individual Investor means an investor who applies or bids for securities of or for a value of not more than Rs.50,000.
1.3 The aforesaid limit of Rs.50,000 was found to be too low particularly in the context of large size book built issues and also resulted in higher transaction costs. In view of this, in March 2005, the DIP Guidelines were amended to enhance the aforesaid limit from Rs.50,000 to Rs.1,00,000.
1.4 The aforesaid stipulation of DIP Guidelines has now been incorporated in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).
2.0 Matter for consideration :
2.1 It is more than five years since the limit of Rs.1,00,000 for defining a retail individual investor was stipulated. It is felt that the aforesaid limit of Rs.1,00,000 for defining a retail individual investor needs to be enhanced on account of interalia the following reasons:
(i) It has been observed that in recent public offerings, approximately 75% of applications in the Retail Individual Investor category have come in the size of Rs.80,000 to Rs.1,00,000. Whereas, in the Non Institutional Investor category, the number of applications in the size of less than Rs 5,00,000 is negligible. The above suggests that Retail Individual Investors who have the capacity and appetite to apply for securities worth above Rs.1,00,000 were constrained from doing so because of the Rs.1,00,000 limit nor do they make an application under the Non Institutional Investor category because the allocation there is limited to 15% as against 35% for Retail Individual Investor category.
(ii) In terms of ICDR Regulations, since 35% of the public issue is to be allocated to Retail Individual Investors, in a large sized public issue e.g. for an issue size of Rs.4000 crores to Rs.6000 crores, the limit of Rs.1,00,000 would mean that the issuehas to receive a minimum of 1,50,000 to 2,00,000 applications from Retail Individual Investors to fill in the 35% 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.
(iii) The rate of inflation in India has increased from about 4% in 2005 to about 12% currently, measured in terms of wholesale price index. In the same period, the BSE Sensex has risen from about 8000 points to about 18000 points. This means that the Retail Individual Investors now buy a lesser number of securities with Rs.1,00,000 than they would buy with the same amount in 2005.
3.0 Proposal:
3.1 Having regard to the above, it is proposed to amend ICDR Regulations to enhance the limit prescribed for defining a Retail Individual Investor in a public issue from the existing Rs.1,00,000 to Rs.2,00,000.
4.0 Public comments:
4.1 As part of the consultative decision making process followed by SEBI in policy formulation, comments / suggestions are invited from the public on the proposed changes. Comments/ suggestions may be sent to the address mentioned below to Mr. Sudeep Mishra, Assistant General Manager, Division of Issues and Listing, Corporation Finance Department, Securities and Exchange Board of India, on or before September 3, 2010.
SEBI Bhavan, Plot No: C-4A, G Block,
Bandra Kurla Complex,
Mumbai 400 051.
Comments/suggestions may also be emailed to sudeepm@sebi.gov.in or to sanjayp@sebi.gov.in.
