IPOs: Minimum price band gap can be based on floor price

KS Badri Narayanan Chennai | Updated on October 08, 2021

Dividing NII category is a welcome step

The Securities and Exchange Board of India's Primary Market Advisory Committee has come out with an important proposal with respect to price band and non-institutional investors quota (generally referred as HNIs) in IPOs.

This column in March had raised the issue of how the current IPO pricing trends make a mockery of the price discovery mechanism with a narrow range of just ₹1-2 used as the price 'band'. The PMAC consultation paper has recommended that the minimum price band in case of all public issues, the difference between the lower and higher limit of prices, through book-built process, be set at 5 per cent.

The decision to widen the price band is welcome. However, instead of a minimum 5 per cent gap, SEBI could consider the minimum range based on the IPO price. For instance, if a company comes out with price at ₹1,000, according to the new proposal, the price band would be ₹1,000-1,050, which is wide enough compared with the current gap of ₹1 or ₹2. However, if a company fixes the minimum price at ₹50 for an IPO, then the price band difference would be just ₹2.5. For those who are taking a leveraged bet, as it is in vogue now, this would not be a big challenge.

So, it would be better to have variable price bands based on the price level. It would be even better if companies are asked to come out with a fixed price issue, in case they seek narrower price bands.

“A narrow price band presents an opportunity to an issuer company to camouflage a fixed price issue as book-built issue thus circumventing the conditions/regulations attached to the fixed price method especially related to allocation methodology,” SEBI said.

In case of book building, according to BSE site, 50 per cent of shares offered is reserved for QIBs, 35 per cent for NIIs and 15 per cent for retail Investors. In case of fixed price, the company should allocate at least 50 per cent to retail individual investors. Demand for the securities offered is known only after the closure of the issue in case of fixed issue.

NII mechanism

SEBI can consider tweaking these norms for fixed price issue too: subscription details can be asked to be disclosed on a daily basis akin to the book building exercise. Besides, relative quotas can also be tweaked based on the issue size. PMAC has also recommended dividing the NII category into two sub-categories: Sub-category 1: One third of the allocation earmarked for NIIs should be for application sizes ranging above ₹2 lakh and up to ₹10 lakh; and Sub-category 2: Two third of the allocation earmarked for for applications above ₹10 lakh.

“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 consultation paper said.

To start with, it is a good proposal. SEBI may consider one more slab, if the current proposals fail to resolve the issue.

Published on October 08, 2021

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