IPO: analysts want pre-2012 proportional allotment method brought back

Pranav Haldea is Managing Director of Prime Database, which manages and publishes extensive data on the capital markets. But that doesn’t mean he has an edge over the ordinary retail investor when it comes to applying for shares in public offers.

“From my own experience I can tell you that at least in the last 20 IPOs that I have applied for, I haven’t got a single allotment,” Haldea said. “For retail investors, that has been the recent experience.”

This fiscal has been a bumper year so far for initial public offers, with₹28,300 croreraised from 31 issues in the primary market so far. But the experience hasn’t been as rosy for retail investors, many of whom simply fail to get shares allotted in the current IPO allotment regime. To change this, brokers have made a representation to securities market regulator SEBI asking it to change the IPO allotment system and raise the investment cap for the retail category to ₹10 lakh, from the current ₹2 lakh.

SEBI changed the method used to allot shares to retail investors in 2012. Under the current system, there is a maximum number of applicants who can be allotted shares, which is a function of the total number of shares reserved for the retail category and the minimum bid lot. In case of very high oversubscription in the retail category, shares are allotted based on a lottery system.

With the current rules, you can either be really lucky and get one entire lot of shares, or in most cases, you don’t get a single share at all.

“As an investor, you can apply under your name and your wife’s name. If the issue gets oversubscribed, which it normally does these days, it becomes a lottery system,” and hence a game of chance, said Kamlesh Rao, CEO, Kotak Securities.

“In the old system, which we think SEBI should go back to, if an investor applies for ₹2 lakh and the issue is subscribed 20 times, he would get at least 5 per cent of what he applied for, that’s for ₹10,000, which could be 10-12 shares. It will not be a lottery system like now and at least some allocation will happen to every customer,” Rao added.

This way, the higher the amount that an investor bids for, the better would be his chances of being allotted shares.

The most popular IPOs of the year have seen massive retail interest, with certain issues being oversubscribed over 10 times in the retail category (see table). “But we have lots of customers who haven’t been allotted a single share in the recent IPOs,” Rao added.

Brokers stand to lose from the new arrangement as well. With the earlier proportionate system, when investors were more likely to apply for the whole limit of ₹2 lakh, brokers earned income on lending them application money, as IPO financing. With the average size of application cheques that retail investors write falling to ₹15,000-20,000 now from ₹80,000 pre-2012, brokers facilitating these applications have lost out on this income stream too.

“In public offers where the retail segment is hugely oversubscribed, an investor may repeatedly lose out on being allotted shares, while for HNI and QIB investors, allotment is still on the proportionate basis,” said the head of the equity capital markets business of large financial services firm. “But both systems have their pros and cons.”

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