Thursday, November 25, 2010

[Review] Increase of maximum size of Retail IPO/FPO portion to 2 Lakh

Recently SEBI amended the IPO norms to change the max limit for retail investors to Rs 2,00,000 from the existing limit of Rs 1,00,000. Reason stated was to increase the retail participation and to enhance the returns of the retail investors.Looks like a investor friendly step taken by SEBI.Isnt it ?.Lets try to dive deep into book building process and try to understand how its going to affect retail investors based on two large recent book building process - Coal India & PowerGrid.
In Coal india IPO there were total of 16.26 Lakh application from retail section. Among them 8.89 Lakh applications were for 1 Lakh and in total they received 81% of the total shares reserved for retail investors.Remaining 7 Lakh investors has to be content with 19% of the shares. The numbes were similar in PowerGrid FPO too .
Total Retail Applications 14.18 Lakhs
Applications for 1 Lakh 7.94 Lakhs
Total shares allocated to this segment 80%

This is not a unfair distribution since the shares are distributed in the ratio of the total shares they have bid for. Lets now consider the situation in which max limit is increased to 2 Lakhs. This is not going to affect investor who apply less than a lakh .But investors who used to apply at 1 Lakh earlier MAY increase their application size up to 2 Lakh ,depending on their affluence. Lets consider that 50% of them are affluent to invest 2 Lakh in a ipo and see how to demand graph changes

Application for 1 Lakh and above will corner more than 85% of all the shares available in retail section.This leads to a situation that investors who can invest less than a lakh (50% of total investor base) will have to share 15% of shares. In most of the cases this will lead to lottery based selection. Eventually these small investors will lose interest in this process (IPO/FPO) which will be dominated by a more affluent section. If this is the situation for large issues like Coal India (15,200 Cr) and Powergrid FPO (Rs 7440) , the deviation will be more pronounced in smaller issues of size which are more frequent to hit the streets.

Now this decision doesnt sound much investor friendly right ?? If SEBI's aim was to increase activeness of retail investors it should have maintained status quo in the max limit.

From Prem's


  1. Could inflation have played a role in such a move?

  2. Precisely that the reason it has been increased .
    My Argument is that because of this sudden increase , niche segment of retail investors will be benefited.
    It might turn out to be a curse in disguise for common investors who can spend 2 Lakh on a single IPO