The Securities and Exchange Board of India (SEBI) has increased the limit of IPO investment for retail investors to Rs. 2 Lakhs from Rs. 1 Lakh. Read on for more details and the significance of this decision for you.
The Securities and Exchange Board of India (SEBI) has recently changed the definition of “retail investor” for Initial Public Offerings (IPO).
Going forward, people investing up to Rs. 2 Lakhs in an IPO would be treated as retail investors.
Why is being a “retail investor” important?
The retail quota – important for allocation
SEBI has reserved a certain percentage of the total IPO for different classes of investors. For retail investors, this is 35% of the total offer. (For non-institutional investors, it is 15%, and for institutions it is 50%). These quotas have remained the same after this decision – they haven’t changed).
In a good IPO, there is a lot of demand from institutional investors (variously known as financial institutions or FI, foreign institutional investors or FII, etc.) and high net worth individuals (HNI).
Since the allocation is on a proportional basis in case of over-subscription, these people would get the maximum allocation in the absence of a quota.
In such a case, the retail investors would lose out – their bids would be smaller, and therefore, the allotment to them would also be very small.
Thus, a “retail” quota and being eligible for it becomes very crucial for small investors in order to get allocation of shares post-IPO.
The “retail” discount
“Retail investors” also get a discount – usually 5% – in many IPOs. This means that they get shares for 5% less than the price discovered by the book building process.
This is free money, and therefore, people prefer staying within the limits of the “retail” quota.
The “retail quota”
To prevent such unjust situations, SEBI had decided that all IPOs would have a quota for retail investors – 35% of the IPO would be reserved for retail investors, meaning that 35% of the shares on offer can only be allotted to small, retail investors.
And the definition of “retail investor” so far was: Any person who invests upto Rs. 1 Lakh.
The change in the “retail investor” limit
Now, SEBI has increased this limit to Rs. 2 Lakhs. This means that people investing upto Rs. 2 Lakhs in an IPO would be treated as “retail investors”, and would be eligible for allocation under the retail quota.
(Till 2005, the limit for “retail investors” was Rs. 50,000).
The implications of this change for you
Increased competition, reduced allocation
Now, since more money would be invested to get allocation of the same set of shares (35% of the IPO), obviously there would be more competition. This would ultimately result in a reduced allocation of shares.
For example, in the recent Coal India Limited IPO, retail investors got about 50% allocation. (If you had applied for 400 shares, you got about 200).
Had the new limit been implemented for Coal India, retail investors would have received a lesser allocation – for example, say 125 shares.
Ability to bid for more shares in quality IPOs
As a retail investor, you would now be able to bid for more number of shares if you think that the offer is good.
However, as we saw above, there is no guarantee that you would get allotment of more shares!
Reduced spurious demat accounts
There is a tendency of people to open multiple demat accounts under different names (usually, the names of close relatives are used) so that they can apply for the same IPO as multiple “retail investors”.
Thus, even if a person applied for shares worth Rs. 4 Lakhs, all the money would still be treated as money from a “retail investor” as he would have applied from 4 different accounts!
Now, even if a person continues that practice, he would open only 2 accounts to invest the same Rs. 4 Lakhs – this means that the number of non-genuine demat accounts should go down significantly now.
Important Note
This rule has not yet been notified by SEBI – it would come into effect only after the notification. This notification is expected to come soon.
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