More space for small investors

A recent proposal mooted by the Securities and Exchange Board of India (SEBI) seeks to create more space for small investors in initial public offerings by expanding the definition of a retail investor. Henceforth applications up to Rs.2 lakh — double the present limit — will come under this category. This is expected to motivate many more investors to apply in the retail category. On analysing the allotment patterns in recent public offers, the regulator has found that the majority of retail applications is in the range of Rs.80,000 to Rs.1 lakh. It is more than likely that many of the applicants have the capacity and appetite to go for shares even beyond the Rs.1 lakh limit but are not doing so because that would push them out of the retail investor category. Current SEBI guidelines require the issuing companies to earmark 35 per cent of the allotment to the retail investors and just 15 per cent to the non-institutional category. The chances of success are greater if shares are applied for in the retail category. Some very large issuers would welcome the hike in the limit for retail investors. For an issue size of Rs.4,000-6,000 crore, the limit of Rs.1 lakh would mean that the issue has to attract a minimum of 1.5 to 2 lakh applications for the retail category quota to be filled, a truly daunting task.

The government is also obviously concerned over the outcome of the forthcoming large disinvestments by public sector enterprises such as Coal India. There have been other moves to enhance the level of retail participation in the share market. The most recent example was the directive to listed companies to keep the level of public float at 25 per cent. A three-year time frame was given to comply with this norm. However, for certain practical reasons the government reduced the size of the minimum float to 10 per cent for public sector companies. A change in the regulatory rules, by itself, is unlikely to increase participation by small investors. Recent public offers by government companies were over-subscribed but retail participation was disappointing. The low discount allowed on the offer price and the complexities of the new auction method were some of the factors that discouraged small investors. A variety of developments such as large-scale technology application and the enhancement of capital requirements for brokers have improved efficiency and security, and the large investors are comfortable with the system. At the same time, small investors are feeling alienated, and the recent steps should go some way in addressing their concerns.

source:editorial: The Hindu