The Securities and Exchange Board of India?s recent ruling making it mandatory for qualified institutional buyers (QIBs) to put 100% of the application money as the margin for subscribing to public issues will create a level playing field for all categories of investors subscribing to public issues. Currently, QIBs have to pay just 10% of the value of shares at the time of application while anchor investors were required to pay 25% at the time of application and the balance amount has to be paid on allotment. As a result, issues are getting heavy subscription from QIBs and they gain an advantage in terms of applying for several issues which open simultaneously. Retail investors, on the other hand, have to pay the total application money for any primary market issuances. This can distort price formation in the market. It has been seen in the past that QIBs sometimes put in huge bids to inflate subscription figures or increase their chances of allotment. Since QIB bids come in mostly on the last day, retail investors often fail to get demand and price cues. But with the new rules, money will chase only quality papers. Moreover, the new rule will discourage institutional investors who subscribe just for the listing day gain, as their cost of funding will go up. Overall, the new rule will ensure parity and reduce distortion in demand.
The new rules which will be applicable for all public issues hitting the capital market after May 1 this year will also reduce the time gap between the dates of issue closure and listing. The time gap at present is around three weeks and the market regulator must bring it down to a week as it has been promising for the past two years. Reducing the time gap between the dates of issue closure and listing will further encourage retail investors to participate in the markets. During the global economic crisis and credit crunch, companies in real estate and infrastructure have been selling shares to QIBs to mobilise funds for their working capital needs. Data shows that in the current financial year till date, companies have mobilised nearly Rs 40,000 crore through this route and various estimates suggest that some 90 companies have shown a willingness to take this route to raise Rs 70,000 crore in 2010. QIBs will, therefore, continue to play an important role in the markets, but Sebi has done well to give retail investors a better opportunity.
