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Sebi proposes changes to fixing IPO price bands and shares allocation rules

Mumbai: The Securities and Exchange Board of India (Sebi) has proposed changes to fixing price bands and allocation of shares to rich investors in initial public offerings (IPOs).

The regulator intends to introduce a minimum price band in all public issues, where the upper price should be at least 5 per cent more than the floor price.

“Lately, it is observed that the price band as provided by the issuer company on the mainboard are extremely narrow, sometimes as small as Rs 1, Rs 2 or Rs. 3. The objective of fair and transparent price discovery mechanism in a book-built issue appears to have been diluted over time due to evolving market practices,” Sebi said in a discussion paper on Monday.

At present, IPOs can be done either through the book building process or fixed price method. In the case of the book building method, the issuer has to provide a price band wherein the upper end of the price band should not be higher by more than 20 per cent of the floor of the band. In the case of the fixed price method, the issuer provides a single price which should be disclosed in the offer document.

“Narrow price band presents an opportunity to an issuer company to camouflage a fixed price issue as book built issue thus circumventing the conditions attached to the fixed price method especially related to allocation methodology,” Sebi said.

Bankers suggest flexibility in the pricing of IPOs.

“There should be an option for fixed price IPO and an option to lower the price band during the IPO in case of adverse market conditions,” said Dharmesh Mehta, MD & CEO, DAM Capital.


The regulator has also proposed dividing the non-institutional investors(NII) category, under which High Networth Investors (HNIs) apply in IPOs, into two. Under this, one-third of the allocation earmarked for applications ranging above Rs 2 lakh and up to Rs 10 lakhs would be one category. Two-thirds of the shares would be reserved for applications above Rs 10 lakhs from HNIs.

Currently, investors in public issues are broadly categorised as qualified institutional buyers (QIBs),non-institutional investors (NIIs) and retail individual investors(RIIs). Under the book building process 35 per cent of the overall issuer size is allocated to retail investors and 50 per cent to QIBs and 15 per cent to NIIs. While in the case of fixed price method, at least 50 per cent should be allocated to retail investors and the remaining issue size can be given to both NIIs and QIBs.

In 2012, Sebi introduced the draw of lots system for allocation to retail investors in oversubscribed issues to ensure a level playing field for all investors. While the proportionate allotment method continued for QIB and HNI category, proportionate allotment of shares was done for all three investor categories.

“It is observed that a few large NIIs are able to crowd out smaller NIIs for allotment in an IPO. . In NII category, the proportional allocation creates incentives to make application of higher bid amount in this category. Thus, applicants in NII category are reportedly leveraging for making applications of higher bid amounts which results in higher oversubscription in NII category,” Sebi said.

The regulator has also proposed to introduce allocation of shares to HNIs by drawing lots and discontinue the current proportionate allotment method.

“There is no need to change the proportionate allotment methodology for HNIs, instead the regulator should ban IPO funding so that all applicants get an equal chance of allotment,” said Mehta. “The euphoria due to excess funding is leading to artificial demand and distorting IPO prices in the short term.”

The extent of oversubscription in the NII category has shot up from a maximum of 195 times in FY19 to as high as 928 times in FY22, said Sebi.

A Sebi analysis of 29 oversubscribed IPOs between January 01, 2018 and April 30, 2021 showed that around 60 per cent of the applicants in the NII category, on average, did not get any allotment.

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