SEBI PROPOSES DIVISION OF HNI SEGMENT IN IPO
Also suggests changes to price discovery norms
The Securities and Exchange Board of India (Sebi) is planning a new approach for price discovery and share allotment process for so-called high net-worth individuals (HNIS) in an initial public offering. In a consultation paper issued on Monday, the regulator has proposed a category within the category for HNIS in a bid to safeguard the interest of those who submit relatively low-ticket bids.
The Securities and Exchange Board of India (Sebi) is planning a new approach for price discovery and share allotment process for so-called high net-worth individuals (HNIS) in an initial public offering (IPO).
In a consultation paper issued on Monday, the regulator has proposed a category within the category for HNIS in a bid to safeguard the interest of those who submit relatively low-ticket bids. A minimum 5 per cent price band — the difference between the lower and upper ends — has also been proposed.
It has also proposed to tweak the allotment methodology for the HNI category from the proportionate basis at present to draw of lots.
Raising concerns about bigger HNIS crowding out smaller ones during an IPO, it has proposed to divide the HNI bucket into two: One for those submitting applications in the range between ~2 lakh and ~10 lakh, and the other for those submitting bids worth ~10 lakh or more.
Currently, IPO investors are divided into three board categories — one for institutional investors, who have a reservation of 50 per cent of the shares sold in the IPO (75 per cent in case the IPO is by a company that doesn’t meet the profitability track record); the second and the third categories are that of noninstitutional investors (NIIS) and retail investors. The retail segment is for those submitting bids of less than ~2 lakh; it has 35 per cent reservation (15 per cent in case the IPO is by a company that doesn’t meet the profitability track record). NIIS or more commonly referred to as HNIS have the remaining 15 per cent reservation.
An analysis done by Sebi of oversubscribed IPOS between January 2018 and April 2021 showed that in the case of 29 IPOS, on average, around 60 per cent of the applicants in the HNI category did not get any allotment. In a few cases, applications for as large as ~75 lakh were also unable to get allotment.
“It is expected that any public offering should aim to provide as diverse an offering as possible with equitable opportunity at the retail and non-institutional level. The current methodology of proportionate allotment carries a certain risk where very large applications by a few NIIS results in crowding out of other NIIS,” Sebi said in the discussion paper. The regulator has sought market feedback as to how the HNI bucket should be further divided and will take a final call on the proposed changes based on the feedback.
According to industry players, the changes suggested in the HNI IPO allotment process could have a significant impact on how investors bid in this category.
Price band
Under the current rules, IPOS can be made either through book building or the fixed price method. Under the book-building process, the issuer offers a price band and the final issue price is determined on the basis of demand. There is a maximum gap of 20 per cent prescribed between the upper and lower end. However, as there is no minimum gap prescribed, several IPOS have a gap of just ~1 between the two ends.
“Lately, it is observed that the price band as provided by the issuer company on the mainboard is extremely narrow, sometimes as small as ~1, ~2 or ~3. An analysis of issues from 2010 demonstrates that the average price band range has reduced significantly... The objective of a fair and transparent price discovery mechanism in a book-built issue appears to have been diluted over time due to evolving market practices,” Sebi said, seeking market feedback on maintaining a minimum 5 per cent difference between the upper and lower ends.
The regulator has also sought feedback on whether there is scope for reforms in the fixed-price IPO regime.