A small but important amendment to the listing and disclosure regulations will soon see public issues reporting realistic subscription numbers especially in the segment reserved for high net worth individuals (HNIs) that is known for huge over subscription based on leveraged finance.
The Securities and Exchange Board of India (SEBI), which has been trying to curb this practice for long, has effectively reduced the maximum bid size of HNIs by half in the revised SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018.
While the earlier regulations allowed each HNI to put in a bid equal to the issue size, the revised guidelines effectively cap such bids to 50% of the issue size.
“... the maximum application by non-institutional investors shall not exceed total number of specified securities offered in the issue less total number of specified securities offered in the issue to qualified institutional buyers,” state the new guidelines.
Simply put, in an IPO of ₹100 crore, while every HNI applicant was earlier allowed to put in a bid worth ₹100 crore, now it has been capped at ₹50 crore. In an IPO, while 50% of the issue is reserved for institutional investors, 35% and 15% allocation is reserved for retail investors and HNIs, respectively.
This assumes significance as many IPOs in the recent past reported oversubscription to the tune of 300 times to almost 1,000 times in the HNI segment even as other segments did not see a similar quantum of oversubscription.
Early this year, the IPOs of Apollo Micro Systems and Amber Enterprises India saw their respective HNI segment getting subscribed almost 964 times and 518 times, respectively. Incidentally, the institutional portion of Apollo Micro Systems IPO was subscribed 102 times.
“The practice of HNIs making huge applications using leveraged finance will be curbed to a large extent,” said Uday Patil, director, investment banking, Keynote Corporate Services.
Realistic demand
“The new regulations would also ensure that the demand for an IPO, especially in the HNI segment is more realistic,” he added.
Interestingly, HNI financing is a huge industry with most non-banking financial companies (NBFCs) lending funds to such investors to bid for shares in an IPO. Typically, such funds are lent for a period of 7-10 days at a rate of 8% to 10% per annum depending on various factors.
More importantly, this leverage allowed HNIs to put in large bids on a very small margin thereby distorting the real demand for the issue and also putting at risk the investors if the shares do not list at a significant premium to the issue price.
“It’s been a long time before the regulator realised that being allowed to bid for shares which can never be allotted is fundamentally wrong. This is a victory for small investors,” said Arun Kejriwal of Kejriwal Research & Investment Services adding that the new regulation would significantly reduce distortion of demand and manipulation of grey market.
