IPO: Sebi proposes changes in setting IPO price brackets and share allocation rules

Mumbai: The Securities and Exchange Board of India (Sebi) has proposed changes to the setting of price brackets and the allocation of shares to wealthy investors as part of Initial Public Offerings (IPOs).

The regulator intends to introduce a minimum price bracket in all public issues, with the top price to be at least 5% above the floor price.

“Lately it has been observed that the price range provided by the issuing company on the motherboard is extremely narrow, sometimes as small as Rs 1, Rs 2 or Rs. 3. The purpose of a price discovery mechanism fair and transparent in a book issue appears to have been diluted over time due to changing market practices, ”Sebi said in a discussion paper Monday.

Currently, IPOs can be done either through the book building process or the fixed price method. In the case of the book construction method, the issuer must provide a price range in which the upper end of the price range must not be more than 20 percent above the floor of the range. In the case of the fixed price method, the issuer provides a single price which must be indicated in the prospectus.

“The narrow price range offers an issuing company the opportunity to camouflage a fixed-price issue into a fixed-price issue, thus bypassing the conditions attached to the fixed price method, in particular related to the allocation methodology”, Sebi said.

Bankers suggest flexibility in pricing IPOs.

“There should be an option for the fixed price IPO and an option to lower the price range during the IPO in the event of adverse market conditions,” said Dharmesh Mehta, Managing Director and CEO of DAM Capital.

HNI SPLIT CATEGORY

The regulator has also proposed dividing the non-institutional investor (NII) category, in which high net worth investors (HNIs) apply in IPOs, into two. Under this, one-third of the allocation allocated to requests above Rs 2 lakh and up to Rs 10 lakh would be a category. Two-thirds of the shares would be reserved for requests exceeding Rs 10 lakhs of the HNI.

Currently, investors in public issues are generally classified as Qualified Institutional Buyers (QIB), Non-Institutional Investors (NII) and Individual Retail Investors (RII). As part of the book building process, 35 percent of the overall issuer size is allocated to retail investors and 50 percent to QIBs and 15 percent to NIIs. While in the case of the fixed price method, at least 50 percent should be allocated to retail investors and the size of the remaining issue can be attributed to both NIIs and QIBs.

In 2012, Sebi introduced the lottery system for allocating oversubscribed issues to retail investors in order to ensure a level playing field for all investors. While the proportional allocation method continued for the QIB and HNI categories, the proportional allocation of shares was carried out for the three categories of investors.

“It is observed that a few large NIIs are able to crowd out smaller NIIs for attribution in an IPO. . In the NII category, the proportional allocation creates incentives to apply a higher bid amount in that category. Thus, applicants in the NII category would take advantage of requests for higher bid amounts, which would result in higher oversubscription in the NII category, ”Sebi said.

The regulator has also proposed to introduce the allocation of shares to HNIs by lottery and to abandon the current method of proportional allocation.

“There is no need to change the proportional award methodology for HNIs, instead, the regulator should ban funding for IPOs so that all applicants have an equal chance of award,” Mehta said. “The euphoria of excess funding leads to artificial demand and price distortion of short-term IPOs.”

The extent of oversubscription in the NII category has grown from a maximum of 195 times in FY2019 to 928 times in FY22, Sebi said.

A Sebi analysis of 29 oversubscribed IPOs between January 1, 2018 and April 30, 2021 showed that around 60% of NII category depositors, on average, did not get any grants.

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