The Primary Market Advisory Committee of the Securities and Exchange Board of India has made an important proposal regarding the price range and quota of non-institutional investors (commonly referred to as HNIs) in IPOs.
This March column had raised the question of how current IPO price trends deride the price discovery mechanism with a narrow range of only 1-2 used as a price “band”. PMAC’s consultation paper recommended that the minimum price range in the case of all public broadcasts, the difference between the lower limit and the upper limit of prices, through a book building process, be set at 5 percent.
The decision to expand the price range is welcome. However, instead of a minimum spread of 5 percent, SEBI could consider the minimum range based on the IPO price. For example, if a company offered a price of 1000, under the new proposal, the price range would be 1000 to 1050, which is wide enough from the current deviation of 1 or 2. However, if a company sets the minimum price at 50 for an IPO, the price range difference would only be 2.5. For those taking a leveraged bet, as is in vogue now, that wouldn’t be a big challenge.
It would therefore be preferable to have variable price ranges depending on the price level. It would be even better if companies were asked to come up with a fixed price question, in case they were looking for narrower price ranges.
“A narrow price range offers an issuing company the opportunity to hide a fixed-price issue as an issue in pounds, thus bypassing the conditions / regulations attached to the fixed price method, in particular related to the allocation methodology”, said SEBI.
In case of book creation, according to the BSE website, 50 percent of the shares offered are reserved for QIBs, 35 percent for NIIs and 15 percent for retail investors. In case of a fixed price, the company must allocate at least 50 percent to individual retail investors. The demand for the securities offered is only known after the closing of the issue in the event of a fixed-term issue.
SEBI may also consider fine-tuning these standards for fixed-price broadcasts: subscription details may be requested to be disclosed on a daily basis, much like the book-making exercise. In addition, the relative quotas can also be adjusted depending on the size of the problem. PMAC also recommended dividing the NII category into two sub-categories: and Sub-category 2: two-thirds of the allocation reserved for requests over 10 lakh.
“Any public offering is expected to aim to provide as diverse an offering as possible with fair opportunities at the retail and non-institutional level. The current proportional allocation methodology carries some risk where very large claims by a few NIIs result in the crowding out of other NIIs, ”said the SEBI consultation paper.
For starters, it’s a good proposition. SEBI may consider an additional panel, if the current proposals fail to resolve the problem.