SEBI Revises Bid Size by HNIs to 50% of IPO
Some of the recent IPOs had witnessed huge oversubscription by High Net worth Individuals (HNIs) in the segment reserved for them. The Initial Public Offering (IPO) of Apollo Micro Systems in January 2018 received 963 times subscription for the HNI segment. Not less than ten IPOs since 2017 reported oversubscription for the HNI portion between 300 and 100 times. Central Depository services (India) (554 times), Amber Enterprises India (518 times) and Mars Financial Services ( 380 timers) are some among them. An amendment to the listing and disclosure regulations by the Securities and Exchange Board of India (SEBI) is likely to reduce the oversubscription to reasonable levels.
IPO reservation for various categories
In an IPO, as per SEBI norms, upper ceilings have been stipulated for allotment to various categories of investors. This is done with the primary objective of ensuring retail investor participation. At present, 50% of the IPO issue size is reserved for institutional investors, 35% for retail investors and the remaining 15% is reserved for HNIs.
Further, at present HNIs are permitted to put in a bid equal to issue size. The revised guideline will limit the ceiling to 50% of issue size.
In numerical terms, in an IPO for rupees 100 crores, allotment for rupees 50 crores is reserved for institutional investors, rupees 35 crores for retail investors and rupees 15 crores for HNIs. So far, every HNI was permitted to bid for rupees 100 crores in the IPO. This will stand reduced to rupees 50 crores as per revised norms. This reduction will happen because of the clause “… the maximum application by non-institutional investors shall not exceed total number of specified securities offered in the issue less total number of specified securities offered in the issue to qualified institutional buyers,” included in the revised guidelines.
Reasons for oversubscriptionin IPO against HNI segment
HNI financing is a lucrative financial service extended by many of the Non-Banking Financial Companies (NBFCs). Under the scheme, NBFCs provide funds to HNIs for subscribing to IPO for periods between 7 to 10 days at attractive interest rate of 8 to 10 percent per annum. The terms of sanction are attractive and documentation formalities are minimal. The easy avenue for funds enables HNIs to put in large bids. Though the margin could be low, the same is made up in volume. The HNIs offload the allotted shares by capitalizing on the listing premium.
How does the oversubscription for HNI segment in IPO affect retail investors?
The bids for large volume and offloading by HNIs at the time of listing are hurting the interests of retail investors. During application phase, the large bids distort the actual demand for the issue. The offloading also leads to decline in listed price as huge volume is offered for trading. Hence, if the listing is not at attractive premium, the retail investors end up at the receiving end. The decision to reduce the bid quantum is widely seen as right move to minimize distortion of demand and manipulation of grey market.
