The decision by the capital market regulator Sebi to allow qualified institutional buyers (QIBs) to bid for a higher price on the follow-on public offers (FPO), and not stick to a price band, is definitely welcome. This is said to be an experimental move to check the responses before implementing the same for initial public offers (IPOs).
Under the new system, QIBs can bid any amount that they deem appropriate for the offer on the higher side and not be limited to a price band. This will allow them to get the shares they want, and promoters will get a better price for their offer. However, implementation on the IPO market would need to be done faster as the action on QIB is higher there.
Several IPOs that have hit the market have been subject to a high instance of QIB over-subscription. The retail side of subscriptions has been low and the QIBs have been gobbling up issues, thereby depicting high demand that can be milked.
However, it is also worth noting that the high demand has also been coming through due to the fact that QIBs need to shell out only 10% on application for IPOs and the rest has to be made after allotment, unlike the retail investors who must provide the full amount. Many QIBs, especially some Indian banks, have been using this route for quick gains. After gaining allotment, these QIBs have been cashing out on listing day and dampening the listing day gains for several retail investors.
When Sebi?s auctioning mechanism kicks in, several of the QIBs that are looking for quick gains would be sidelined and the actual demand for good paper would surface. Many merchant bankers reckon that this would take away the ?quick buck? institutions, leaving the most serious ones to determine the real price. The flip side, however, is that the grey market will get a benchmark and the higher biddable price could well decide the premium. To make this truly transparent, Sebi must also look at increasing the upfront payment portion demanded of QIBs. This will set the pace for real time price discovery, especially when combined with the reduction in the IPO issue and allotment data, which the chairman has mentioned already.
?akash.joshi@expressindia.com