If the idea is to bring in a greater element of seriousness and transparency into the bidding process for public offerings, by asking large institutional investors to cough up the entire bid amount upfront, the capital market regulator is probably on the right track. The Securities and Exchanges Board of India (Sebi) believes that Qualified Institutional Buyers (QIBs) should write out a cheque for the total value of shares that are bid for rather than just putting up a margin of 10% like they do at present. Sebi has been threatening to change the rules for some time now so as to create a level-playing field between larger and smaller investors, who have been paying the entire subscription amount at the time of submitting the application.

For foreign QIBs the new subscription guidelines will certainly come across as very different from those that they are used to following overseas. The book-running process in developed markets is typically conducted in a manner such that payments are made against the delivery of shares. In other words, money is not blocked. That?s possible because rarely does book-building involve retail participation in the western world whereas in India half the book is reserved for smaller investors. Money has to be collected upfront from small investors because it would be near impossible to chase them for payments after the issue has closed. Institutions, on the other hand, are unlikely to not pay up once they receive their allotments.

QIBs may carp that they will be out of pocket for a few days because their money would be blocked till such time as they receive the shares. Moreover, they would also need to hedge the currency exposure for a slightly longer period. However, a part of the problem should get resolved once they are allowed to use the ASBA (application supported by blocked amount) facility from May this year, which Sebi has said should be possible. While the interest earned on the application money lying in the ASBA account may not fully compensate for the hedging costs, it would nevertheless take care of some expenses. The ASBA facility is already available for smaller investors.

The problem that Sebi is trying to address by asking QIBs to also pay 100% of the bid amount upfront is one of institutional bids being reportedly inflated so as to create an impression that the issue is one of high quality. Since they needed to put out just one-tenth of the amount, there could have certainly been instances where QIBs have been known to put in bids early on. That should change now and it?s possible QIBs will wait till the last day before submitting a bid. So the bids from QIBs could be far more muted than they have tended to be so far. That may not be such a bad thing and is certainly better than bids that are unnecessarily inflated and therefore, misleading. India is among the most attractive investment destinations in the world today and while they may complain for a while, foreign investors should soon get used to the new norms.

Indeed it?s the smaller investors who, typically, are known to try to get a cue from what institutions are doing, who may be in a bit of a spot. Since large institutions are in a better position to judge the quality of the paper being sold and, therefore, the price at which it should be bought, they facilitate better price discovery. If QIBs stay away till the very end, smaller investors won?t really be able to gauge their interest. Also, the book on subscriptions is now displayed on exchange websites and so investors are able to keep track of the responses from the various categories which are updated every hour. But that may change. Sebi has apparently asked the exchanges to stop making the subscription numbers public while an issue is open and has suggested that information be put up only after the issue closes. That means retail investors will have no way of knowing how much institutions have bid for. Of course retail investors usually invest at the cut-off price or the discovered price or in the case of an alternative book-building, at the floor price. So to that extent they don?t seem to be too sensitive to the price. But they are nevertheless sensitive to how much QIBs are buying because that would determine the success of the issue. Perhaps Sebi could close the institutional book a little earlier and disclose the subscriptions so that retail investors can at least take a look. As it is, in the recent past, small investors have been wary of buying into public issues; the follow-on offers of state-owned NTPC and REC saw the retail quota attract very poor participation as have some of the IPOs.

shobhana.subramanian@expressindia.com