GRIP seeks big role for small investors

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SEBI monitoring market situation closely

: A Sebi-appointed expert group has recommended a slew of reforms to give a level-playing field to retail investors in the primary market. Sunny Verma analyses the report in detail

Small investors would no longer play second fiddle to big (read institutional) investors. As capital markets regulator Securities and Exchange Board of India (Sebi) gets ready to roll out its second generation reforms, the spotlight has been turned on creating a level-playing field for retail and institutional investors.

So, what's on the cards? A series of initiatives aimed at reforming the market for initial public offers (IPOs), to make the issue process more efficient and less time-consuming. And, what does it have for retail investors? The quota for the single retail investor in an IPO would be doubled to Rs 2 lakh while a host of other measures would be adopted to make the issue process less cumbersome.

Moreover, qualified institutional buyers (QIBs) would have to shell out 100% of their bid amount, at par with retail investors. These are some of the recommendations made by a Sebi panel to transform the IPO market.

The Sebi-appointed Group on Review of Issue Process (GRIP), in its report submitted to the regulator recently, has suggested a litany of measures to minimise the cost and time involved in the process.

This is not the first time a Sebi committee has suggested ways to reform the IPO market. But this time, the regulator seems determined to spearhead the reforms in the primary market.

Sebi chairman Chandrasekhar Bhaskar Bhave had made it clear last week that the regulator will review the primary market issuance process and take into account suggestions in the GRIP report. The markets regulator seems to be in sync with the GRIP suggestion of creating a level-playing field for retail and institutional investors.

This means that in the months to come, institutional investors would have to put in 100% of the margin money while subscribing to an IPO. Currently, while retail investors are required to deposit 100% of their bid amount, the same for institutional investors is 10%.

Another proposal that lies at the heart of primary market reforms is to minimise the time gap between opening and listing of an issue. This would not only reduce over-subscription but also silence critics that say institutional investors should not be asked to lock their money for so many days.

“Institutional investors tend to argue that they put in a lot of money that cannot be locked in for such a long time. Secondly, some people have raised the issue of funds that remain with banks. That issue will also be automatically addressed once we reduce the gap,” Bhave had said at a press meet that followed the board meeting.

Primary market analyst Prithvi Haldea says, “The move will bring sanity into subscription levels during IPOs.”

Reduction in the time gap would also help in discouraging the grey market for shares.

The GRIP report argues that the period between the close of an issue and its listing should be lowered to seven days from the current 21 days, while some officials involved in the policy-making process said it should be cut to three days. A final decision would be known once the markets regulator firms up its views on this.

Sebi has already cut the settlement period in secondary market from T+42 days to a mere T+2 days, that is, 2 days after the transaction. A similar reform is possible in the primary market too. “There is an urgent need to close this time gap so that retail investors' money is not locked for 21 days,” says Haldea.

GRIP has further suggested that the government should do away with physical filing of application forms. Instead, the entire process should be made online using the Internet and the existing broker network in the country. A central integrated platform (CIP) can be created in order to drastically reduce the time gap, the report said.

Various other measures have been suggested to speed up the IPO process. The panel has recommended that companies be permitted to file a draft offer document with Sebi even if they are yet to receive authority for issue of capital and the high court approvals for mergers/de-mergers.

This would help in saving the time, which is otherwise spent in obtaining these approvals first and then filing the draft offer document, says the report.

According to sources, Sebi’s primary markets advisory committee (PMAC) has begun discussions on the GRIP report. Some critics argue that suggested reforms are half-hearted, as they do not address the problem of low-floating stock.

“We are euphoric about our market cap, but a major part of it is illusory as the floating stock remains very low,” argues a senior government functionary, requesting anonymity.

Retail participation, by design or

by regulation, can be as low as 3% of the market capitalisation of a company, he says. In fact, the finance ministry has recently issued a discussion paper proposing that every listed company should offer at least 25% of its shares to the public, instead of the current 10%. It has also suggested excluding institutional investors from the definition 'public', thereby throwing open access to more shares by retail investors.

The ministry also proposed to amend the Securities Contracts (Regulation) Rules, 1957 (SCRR) to usher in these changes. The government’s view is that 25% public holding would ensure that shares are widely distributed and retail investors get to participate in the success story of India Inc.

While some analysts believe that it would help in spreading the equity-cult and increasing the floating stock, others argue it may discourage enterprise. The government feels that having a greater distribution of shares would reduce the possibility of price manipulation. Market participants have welcomed the move, but said that it may be difficult to implement if it is applied retrospectively.

Meanwhile, the Sebi panel has argued for overhauling the price discovery mechanism. It has suggested that the issuer, or companies going for IPOs, should mention the 'indicative price' in the Red Herring prospectus instead of the price band. Retail investors can be given the option of participating at a maximum of 1.2 times the indicative price.

The mechanism would work like this: if the indicative price is Rs 10 per share, a retail investor can bid at a maximum of Rs 12. In case, the price discovered is higher than Rs 12, then retail investors would be allotted shares at this bid price of Rs 12. In case it is lower than Rs 12, the investors would be allotted shares at the discovered price and the balance amount would be refunded to them.

This will help "in better and more efficient price discovery" and will be administratively convenient, the GRIP report says.