Ajitansh Kar, Gurugram, 5 July 2023
The Securities and Exchange Board of India (SEBI) released several new regulations in the process of Initial Public Offering (IPO) of securities in Indian markets a year ago. Many are still confused about these restrictions, particularly the change in the allotment process of subscribed securities.
Previously, there were three primary categories in which anyone might bid for a public offering: retail, High Networth Individual (HNI), and Qualified Institutional Buyer (QIB). Applicants in the retail category were allowed to put forward a bid of no more than two lakh rupees. The allocation for this category is determined by a lottery mechanism, which has not altered with the introduction of the new criteria. QIBs are institutions and businesses that have been designated as such by SEBI due to specific norms and regulations. They have the right to make bids of no less than Rs. 10 crore on any public issue. In any issue, they have the most securities available for subscription. The allocation rules in this category have stayed mostly unchanged.
Previously, the HNI category included applicants who make applications worth more than Rs. 2 lakh. The allocation rules for this category were extensively changed. Previously, allocation in this category was based on the proportionality of the shares bid for. For example, if an IPO was oversubscribed, all bidders would get all the securities applied for. However, if the issue was oversubscribed, say 100 times in the HNI category, applicants who registered for 100 lots of the issue would definitely be assigned a single lot of the issue. This was a huge problem, since these HNI applicants acquired short-term unsecured loans from numerous NBFCs for no more than 15 days in order to apply for IPOs and increase their chances of getting shares allotted to them. This resulted in immense oversubscription in several high-demand IPOs, limiting regular people who applied in the HNI category from receiving allotment in their chosen issue. For example, during the bidding stage, a defence business by the name of Paras Defence was oversubscribed by as much as 950 times in the HNI category, making it both difficult and doubtful for the applicants in this category to receive any allocation.
The allocation guidelines for this category have been altered by SEBI to deal with this problem. Following the implementation of the new regulations, the HNI or Non-Institutional Investors (NII) category was split into two categories: Small NII (applications between two lakh and ten lakh rupees) and Big NII (applications over ten lakh rupees). A minimum of 15% of every public offering is set aside for thus category, with one-third going to sNII and two-thirds to bNII. Since there is no assurance of allotment, the proportionality-based allotment approach has been changed to a lottery system, making it challenging for borrowers of money to apply. For instance, all the securities will be distributed to bidders in accordance with the shares requested if an IPO in the HNI category (including sNII and bNII) is undersubscribed. On the other hand, a lottery system will be used to decide the allocations if the issue is oversubscribed, regardless of how large an application may be. Even if one receives an allocation, it will only be for the category’s basic amount, which is Rs. 2 lakh for sNII and Rs. 10 lakh for bNII category.
Many individuals think that SEBI’s action was clever because it allowed many underfunded investors to participate in the HNI category allocation process and allowed many people to invest in a public issue. However, this action has also caused a significant drying up of bid requests for issues in this category. In contrast to Paras Defence’s 950 times oversubscription, IdeaForge, a recently completed IPO with huge Grey Market Premium (GMP), experienced only 80 times oversubscription from HNI investors.
Thus, SEBI’s new guidelines for the HNI category have brought about a sense of balance and stability in the allotment process of IPOs in this category.