Market regulator Sebi on Monday proposed a minimum price range of 5% for public issues through a book-building process and sub-categorization of non-institutional investors. Sebi has solicited comments on his proposals in a consultation paper for reviewing the price bracket and book-making framework for public issues.
Comments can be submitted until October 20, 2021. The recommendations came as Sebi observed that the price range provided by the issuing companies on the main board is extremely narrow. Several concerns were the subject of deliberations by the Primary Market Advisory Committee (CCGA).
“The goal of a fair and transparent price discovery mechanism in a constructed book issue appears to have been diluted over time due to changing market practices,” he said.
A narrow price range offers an opportunity for an issuing company to camouflage a fixed price issue as a book build issue, thus bypassing the conditions / regulations attached to the fixed price method, in particular related to the allocation methodology, a-t -he adds. PMAC recommended that a minimum price bracket for all public broadcasts through the book-making process could be set at 5 percent. This would mean that the top price must be at least 5% above the floor price.
Sebi also asked if a minimum price bracket was needed in public issues and, if so, what should it be. In accordance with capital issuance standards and disclosure requirements, an initial public offering (IPO) can be carried out using two methods: book building or the fixed price method. In the case of a book-building method, the issuer provides a price range in which the upper end must not be more than 20% above the floor price.
Sebi also raised concerns about the current proportional attribution methodology to non-institutional investors (NIIs), which carries some risk when very large requests for a few NIIs result in foreclosure of other NIIs. The regulator analyzed oversubscribed IPOs between January 2018 and April 2021 and observed that in 29 IPOs, on average, around 60% of applicants in the NII category did not receive any allocation.
“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,” Sebi said.
As the number of smaller NIIs continues to grow, the committee proposed a sub-categorization of NIIs into two categories. In the first sub-category, one third of the allocation allocated to NIIs will be intended for application sizes between more than Rs 2 lakh and Rs 10 lakh. For the second sub-category, he proposed that two-thirds of the allocation reserved for NIIs be intended for requests exceeding Rs 10 lakh.
“In addition, the proportional allocation in case of category NII may be discontinued and allocation by lottery will be introduced, as is currently applicable for category RII”, in accordance with the committee’s proposal. RII refer to individual retail investors.