The Hindu Business Line : Protecting the `real' investors

To draw more individuals into the equity fold, the Securities and Exchange Board of India has introduced significant changes to the mode of allocation of Initial Public Offerings (IPO) to give retail investors a larger stake.

For instance, the share of retail investors in book-built IPOs has been revised upward from 25 per cent to 35 per cent. They can now apply for shares worth Rs 1 lakh instead of Rs 50,000. On the other hand, the allocation for high net worth individuals has been reduced to 15 per cent from 25 per cent. The price-band period has been curtailed from 5-10 days to 3-7 working days.

On paper, these look like a sweeping change. In reality, however, investors who intend to apply for shares worth Rs 50,000 to Rs 1 lakh will be treated as retail investors and not included in the group of high net worth individuals.

With this move, an additional 10 per cent of an issue also gets shifted to retail investors. There is no net benefit for retail investors, as along with proportion of shares issued, the number of investors has also been increased in this category. This step will not attract new investors but will result only in a shift and 10 per cent shareholding from one group to another. SEBI should not have redefined the definition of retail investors to include those investing between Rs 50,000 and Rs 1 lakh. Instead, it should have cut the allocation for promoters.

The idea of reducing the bidding period also appears flawed. The small or retail investors take more time to respond to IPOs due to inadequate infrastructure and limited information. If the issuer announces the price-band only a day before the issue, retail investors get very little time to form an opinion on the IPO. Individual shareholders are not a significant segment. In the 1970s, they used to account for 34 per cent of shareholdings of companies. Today, according to NSE data, the Indian public, by and large, composed of individuals, accounts for only 17.7 per cent holding, whereas promoters hold, on an average, 55 per cent. Thus, there is a domination of promoters.

The small individual investor plays a passive role in the running of the company and has little or no say in its policies.

The table shows the distribution of holdings, industry and investor wise.

The public holding is low in finance (19.6 per cent), manufacturing (15.5 per cent), media and entertainment (17.6 per cent), petrochemicals (18.5 per cent) and telecommunication (5 per cent).

SEBI should strive to expand the base of individual investors. Of course, this also means that there must be adequate safeguards for the small investor.

A SEBI-NCAER's (National Council of Applied Economic Research) survey of Indian investors revealed that 36 per cent and 34 per cent of equity-owning households have monthly income of Rs 10,001-15,000 and Rs 5,001-10,000 respectively. These — and those with a monthly income of Rs 5,000 — are the real investors and require strong protection measures.

Just a downward blip in the market in the last week of March may have left small investors poorer by Rs 1,000. SEBI has to curb speculative booms if it wants to protect the real investors.

Another important feature of equity-owning households is that investors with incomes of above Rs 15,000 per month hold only 22 per cent of all shares held by individuals.

If we recognise these equity owners as high net worth individuals, their holdings are below 25 per cent, which has been the allocation limit for HINs till now. This implies that retail investors, not high net worth individuals are are the retail investors.

Finally, the retail investment limit should be restored to Rs 50,000 and the cut instead of pruning the high net worth individuals' proportion.

Retail investors' limit should be reduced to Rs 40,000 with their share at 35 per cent and those making an investment allocation of Rs 40,001-Rs 50,000 should be treated as high net worth individuals.

(The author is a former Economic Advisor to SEBI.)

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