The government and regulators have agreed to hike the quota for mutual funds in public offers in order to promote retail investment in share markets. Currently, in public floats based on the book-building method, half the shares on offer are earmarked for qualified institutional investors, of which 5% is available to mutual funds.

While the finance ministry is in favour of hiking the quota for mutual funds to promote competition among the institutions, market regulator Sebi has also agreed to increase the quota for mutual funds, a source familiar with the development said.

Besides the 50% reserved for qualified institutional investors in public issues, 35% is earmarked for retail investors. The remaining 15% is for high net-worth investors. The government has been toying with proposals to either increase the retail quota or make provisions within the quota for institutional investors. Giving a greater play to mutual funds make sense as they have emerged the preferred vehicle for equity investment by retail investors.

?We want to increase the participation of retail investors, especially small investors, in the equities market. Increasing the quota for mutual funds will be helpful in enhancing investor participation,? the source said.

Increasing the share for mutual funds will further boost an industry already growing in double digits, said Dhirendra Kumar, CEO, Value Research, a mutual funds? tracking company. According to the latest report by the Associated Chamber of Commerce & Industry of India on MF growth patterns, assets under management could grow 30% annually in the next three years to touch Rs 9.50 lakh crore, from Rs 4.67 lakh crore in July 2007.

In major public issues, the list of institutional investors is dominated by FIIs. While MFs can bid, too, they have often lost out as to FIIs as the latter quote higher prices in the book-building period, but which they often scale down as the book closes. The new proposal will give MFs an opportunity to match the pricing strategy of FIIs.

The Primary Markets Advisory Committee of Sebi is examining options to reform the market for public issues.