Sebi begins review of public issue norms

Regulator revisits retail quota, pricing and refund rules.

Triggered by the recent market volatility and low floating stock of high-value shares in the market, the Securities and Exchange Board of India (Sebi) has kick-started an extensive review of various issues related to the primary equity market.

According to sources close to the development, the review is based on recommendations forwarded by the Parliamentary Standing Committee following the IPO demat scam and recommendations of the Securities Markets Infrastructure Leveraging Expert Task Force (SMILE) headed by Axis Bank Chairman P J Nayak.

The major issues under review are pricing of IPOs, quota reservation for the retail segment in IPOs, reducing the timeframe for listing IPOs, the refund system in case of unallotted IPO shares and the minimum public holding in a company.

There is a view that the quota system for the retail segment should be scrapped since the small investor base is not widespread.

Instead there could be a proportionate allotment for small investors, given that they comprise a minuscule portion of the total market participants.

Incidentally, in 2006, National Securities Depository (NSDL) had suggested the abolition of quota for retail investors in IPOs in its report to the market regulator on multiple dematerialised accounts.

Under the current practice, while 50 per cent of the allotment in an IPO is set aside for institutional investors, 15 per cent goes to high networth investors and the remaining 35 per cent is reserved for small investors.

NSDL had said quota for small investors should be done away with till the infrastructure for checking frauds involving multiple accounts were put in place.

The regulator is also revisiting the option of a fixed price mechanism for IPOs as against the book-building process, which is akin to auctioning bids.

Sources said in recent times, the book-building mechanism had been questioned as most of the promoters had failed to earn a good price for their public floats.

This is because shares get traded at a much higher price right on the first day of trading compared with the issue price. This has also led the regulator to ask for the circuit filter to be imposed by exchanges even on the first day of trading.

While the regulator has decided in principle to make it mandatory for all promoters to offload 25 per cent of their shares to the public for being listed on exchanges, it may give a timeframe of six months to a year from the date of the final notification for companies to comply with the new norms.

The other proposals under consideration are bringing down the timeframe for the IPO process, expediting the listing process and quickening the process of refund for unallotted IPO shares, provided payments have been made through the electronic fund transfer of banks.