Sebi proposes sweeping changes to HNI allotment process for IPOs

The Securities and Exchange Board of India (Sebi) has mulled a new approach for price discovery and share allotment process for so-called high networth individuals (HNIs) in an initial public offering (IPO).

In a consultation paper issued on Monday, the regulator has proposed a category within category for high-networth individuals (HNI) to safeguard the interest of those that submit relatively low-ticket bids. A minimum five per cent price band—difference between lower and upper end has also been proposed.

Sebi has issued concerns over large HNIs crowding out smaller ones during an IPO. It has been proposed to divide the HNI bucket into two. The first one will be for those submitting applications in the range between Rs 2 lakh and Rs 10 lakh. The second for those submitting bids worth Rs 10 lakh or more.

Currently, IPO investors are divided into three board categories. First one being institutional investors, who have a reservation of 50 per cent of the shares sold in the IPO (75 per cent in case the IPO is by a company that doesn’t meet the profitability track record). The second and third categories are that of non-institutional investors (NIIs) and retail. Retail are those submitting bids of less than Rs 2 lakh, have 35 per cent reservations (15 per cent in case the IPO is by a company that doesn’t meet the profitability track record). While NII or more commonly referred to as HNIs have the remaining 15 per cent reservation.

An analysis done by Sebi of oversubscribed IPOs between January 2018 and April 2021) showed in the case of 29 IPOs on an average around 60 per cent of the applicants in the HNI category did not get any allotment. In a few cases, applications for as large as Rs 75 lakh were also unable to get allotment.

“It is expected that any public offering should aim to provide as diverse an offering as possible with equitable opportunity at retail and non- institutional level. The current methodology of proportionate allotment carries a certain risk where very large applications by few NIIs results in crowding out of other NIIs,” Sebi has said in a discussion paper.

Sebi has sought market feedback as to how the HNI bucket should be further dividend. The regulator has also proposed to tweak the allotment methodology for the HNI category from proportionate basis at present to draw of lots.

The regulator will take a final call on the proposed changes based on market feedback.

Industry players say the changes suggested in HNI IPO allotment process could have a significant impact on how investors bid in this category.

Price band

Under the current rules, IPOs can be made either through book building or fixed price method. In a book building process, the issuer offers a price band and the final issue price is determined on the basis of demand. There is a maximum gap of 20 per cent prescribed between the upper and lower end. However, as there is no minimum gap prescribed, several IPOs have a gap of just Re 1 between their upper and lower end.

“Lately, it is observed that the price band as provided by the issuer company on the main board is extremely narrow, sometimes as small as Rs 1, Rs 2 or Rs. 3. An analysis of issues from 2010 demonstrates that the average price band range has reduced significantly. “The objective of a fair and transparent price discovery mechanism in a book-built issue appears to have been diluted over time due to evolving market practices,”Sebi said in the discussion paper, seeking market feedback on maintaining a minimum 5 per cent difference between upper and lower end.

The regulator has also sought feedback on whether there is scope for reforms in the fixed-price IPO regime.

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