A recent decision by the equity markets regulator, SEBI, has wide ranging implications for the capital market and its investors. From May 1, all those who want to apply for shares in a public issue must produce 100 per cent of the money as margin. Hitherto, qualified institutional bidders (QIB) were required to bring in just a tenth of the bid amount, while retail investors, in contrast, were required to provide for the full extent of application money. This practice was justified on the basis of some tenuous logic: retail applicants can furnish the full amount because the average size of an application is not very large, and there are banks and other agencies to provide finance, if need be. On the other hand, institutional investors are reckoned to be better credit risk. They would not ordinarily have any difficulty in bringing in the allotment money to the full extent required. This practice of allowing large investors to make “leveraged” bids is in keeping with a policy stance that moved away from the fairly even-handed treatment of all investors in the primary market that characterised capital market regulation during the early years of SEBI. The justification in allowing the QIBs to bid for large chunks of shares, while putting up only a fraction of the required amounts, is that they can participate in multiple offerings as well as submit bids for several times their requirements with a limited outlay.
What has been left unsaid of course is that the large institutional bids create an artificial premium for the particular offering. That along with the deliberately well-publicised reports of a massive oversubscription on day one would induce small investors, including fence sitters, to apply. The only way to strike at this pernicious market practice is to place all investors on the same footing as far as initial applications to a share issue are concerned. The argument that large investors suffer an opportunity cost in terms of lost interest and should therefore be allowed to bid with a small margin does not wash. Retail investors too suffer a similar fate. Besides, SEBI has asked for faster allotment procedures to be in place soon. The regulator can consider extending the ASBA (application supported by blocked amount) procedure, now being popularised for retail investors, to the institutional segment as well. Under this, applicants to a share issue authorise their banks to block funds equivalent to the application money. Since it is only at allotment time the funds are released, there is no interest loss. Though belated, the latest regulatory action to check information asymmetry and the spread of misleading, potentially price-distorting information is welcome.
Correction
The expansion of QIB is Qualified institutional buyer. The above Editorial gave it as “qualified institutional bidders”.
