The Hindu Business Line : Levelling the bids

SEBI's recent decision requiring all investors in public offers to bring in the full application amount upfront may help weed out the phenomenon of qualified institutional bidders (QIBs) inflating their requirement for a particular primary market offering. Asking institutional bidders to put up the entire bid amount ensures that a level playing field is created between institutional and retail investors. There now exists an anomalous situation, wherein individual investors applying for relatively modest lots are required to cough up or block the entire funds in advance for the quantum of shares requested. In contrast, QIBs are given the leeway to bid for large chunks of shares, while putting up only a tenth of the required amount. This allows institutions with a limited outlay of funds, to enter bids for several times their actual requirement and also to participate in multiple offerings at the same time.

This could potentially mislead retail investors into thinking that this exaggerated bidding by institutional investors is indicative of the intrinsic merits of the offer. While retail investors, by and large, have not fallen into this trap in recent times — their support for some public issues has been lukewarm despite overwhelming institutional response — the market is better off without such potentially discriminatory and misleading features. The argument that QIBs suffer a substantial opportunity cost as their funds are locked up during the allotment process in an IPO is not valid as retail investors too suffer a similar fate. In any case, the facility of merely having one's funds earmarked as opposed to being paid out (through the ASBA mechanism) — a feature currently available to retail investors — being extended to institutional investors should address this problem. Moreover, the fact that SEBI intends to ask corporates to bring down the time lag between application and eventual refund of excess monies, should address institutional investor concerns.

While SEBI has acted with commendable common sense in providing a level playing field between the retail and institutional segments, the same cannot be said of its proposal to insist on physical delivery in the case of derivative contracts on specific stocks. It goes against the very spirit of derivative contracts, which are meant to enable those with views on stock prices to participate in the market, though they may not possess the actual stocks. There should, of course, be no settlement crisis on account of unbridled speculative activities, but even the worst critics of the present system of cash-based settlement would concede that the margin requirements on such trades have mitigated such a possibility.

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