MUMBAI: Public issues, it seems, are not quite meant for the ‘public’. At a time when more and more retail investors are looking to hop on to the equity bandwagon, promoters have taken refuge in a decade-old regulation that allows them to dole out more shares to institutional bidders at the cost of retail ones.
And the sad part is that this is perfectly legal and only an initiative from the market regulator can create a more level-playing field for small investors.
According to capital market regulations, if promoters dilute more than 25% during an initial public offer (IPO), retail investors can be allotted 35% of the issue, while institutional category and HNI segment commands 50% and 15%, respectively.
However, promoters are nowadays diluting less than 25%, as this allows them to cap the retail portion at a maximum of 30%. The institutional portion in such cases go up by 10%. For small investors, this 5% difference can be substantial when the issue size is large.
Interestingly, this special clause — Rule 19(2)(b) — was introduced by the Securities and Exchange Board of India (Sebi) in 1999 for technology companies wherein promoters were allowed to dilute 10% if the issue size was more than Rs 100 crore.
This also meant that QIBs could be allotted 60%, while HNI and retail portion was capped at 10% and 30% respectively. While initially the special clause was applicable only to technology companies, it was subsequently extended to all sectors.
Meanwhile, two of the most high-profile issues in recent times — Reliance Power and Future Capital — that are about to hit the market shortly are also using this age-old clause (by diluting only around 10-12%) to allocate more to the institutional investors. For instance, Reliance Power, where 22.8 crore shares are on offer, retail investors can bid for only 6.84 crore shares.
While this trend has been on an upswing for quite some time now, the recent past has seen a near complete disappearance of issues where retail investors were offered 35% of the total issue. Industry watchers say this trend is killing the very concept of ‘public holding’ in a publicly listed company.
“The clause was valid when it was introduced”, says Prithvi Haldea of Prime Database, adding that now times have changed and there is an urgent need to revisit it. “May be increasing the Rs 100 crore limit to Rs 300 crore or Rs 500 crore could be a practical option as there is enough depth in the market to absorb such an issue,” he said.
The effect of this clause can be gauged from the shareholding pattern of some of the companies that turned ‘public’ last year.
The retail holding in Puravankara Projects is a lowly 0.8%. In the case of Motilal Oswal Securities and Omaxe, the retail stake is 3.43% and 3%, respectively. After the mega-sized public issue of DLF, retail investors have a 2.25% stake in the real estate major. In Vishal Retail, public stake is less than 5%.
However, merchant bankers, quite expectedly, are happy as it allows them to allocate more shares to institutional investors. “Promoters want more institutional investors as their shareholders”, said an investment banker on condition of anonymity. “Ultimately, it is the name of the foreign or domestic institutional entities that will attract more investors,” he added.
Some bankers are also of the view that promoters like to leave some room for a follow-on offering or a qualified institutional placement and so decide against a dilution of around 25%. However, bankers remain tight-lipped when questioned about the importance of the law in the current scenario.
