Retail investors know their IPOs too

One of the celebrated stories of post-liberalisation capital markets is the coming of age of retail investors. When FPIs sold record amounts of Indian shares last year, it was the average Indian who stood like a rock. But investment bankers just don't want them. At least not in the IPO market.

At a meeting with Sebi last month, a group of investment bankers proposed the regulator trim the proportion of shares reserved for retail investors in an IPO and route those to institutional bidders. This appears to be the fallout of some big, overpriced IPOs that were given a cold shoulder by retail investors, making bankers scramble to ensure they sailed through.

The investment banking industry's irritation appears to have stemmed from their inability to have total control over the IPO market. Present rules mandate half of IPO be reserved for institutional investors, 35% for retail, and the remaining for HNIs.


Indian equity markets created world records in trading volumes, thanks to their retail participation. Individual investors now contribute 34% of the average daily turnover in the cash market, compared with 27% for both domestic and foreign institutions put together.

When it comes to IPOs, too, they are equally enthusiastic. Otherwise, India wouldn't have created a record in the Asia-Pacific last year. To portray a picture of retail ignorance is misplaced. Last year, 92 companies raised ?1.62 lakh cr through IPOs - more 3x what they did the year before. Many issues were subscribed 30-40x the offer, including the retail segment.

So, only a few circumspect retail bids, such as Hyundai Motor and Hexaware Technologies, that probably seemed overpriced compared with listed peers, does not mean that regulations that have been fair to all segments need to be tossed out.

To be sure, the IPO market is massive, remunerative and controlled by a handful of banks. Reducing the size of the retail portion would eliminate the need for many road shows and ensure the success of an IPO with a few meets around Mumbai and Goa, with participation from familiar institutional investors. But that may not be ideal for an aspiring economy.

The regulator, with a mandate to develop capital markets and spread investment culture, should reject this proposal, as it would worsen the skewed IPO market that's in dire need of reforms since some provisions contradict its broader objective.

At the broadest level, the regulator mandates public holding of about 25% of a company for listing. It's a mystery as to why the regulator continues to permit IPOs with just about 10% float and, in some cases, even less. Furthermore, its stratification of shareholding, like selective placements before the IPO, institutional quotas and lock-in of shares, has been counterproductive.

Some of these provisions were aimed at ensuring integrity of the market. But they have been turned into a tool to influence market prices, in much the same way as circuit-breaker provisions were manipulated to rig stock prices.

A dipstick study of performance of stock prices after IPOs would show there have been abnormal movements with little delivery volumes. That's due to poor floating stock - adjusted for institutions that have agreed not to sell soon - being as low as 3% in many cases. This counters Sebi's intent of price discovery through higher public holding.

Sebi must conduct a study on price movements after the listing, how expired lock-ins affect prices of stocks, and how subsequent placements of shares at higher prices serve to slowly reach the mandated public float quota over many years.

Apart from mandating higher public float, the regulator also needs to examine whether it makes sense to continue with the quota system, where various segments receive discretionary allotment in lieu of a lock-in. While the lock-in was to ensure the investor had skin in the game, as it becomes the benchmark to price IPOs, it's turning out to be a trigger for many short-sellers to push down prices ahead of lifting of restrictions.

Over the years, integrity and vibrancy of the IPO market has changed global perception about Indian capital markets. From the days when Indian companies lined up to list on Nasdaq, MNCs are now eager to list here.

Much of it has been possible due to democratisation of investment culture among individuals moving to stocks from bank deposits, real estate and gold. So, Sebi not only has to ensure that its development mission over the years isn't compromised, but it also must ensure that retail investors get an increased share of the nation's prosperity.