Book-runner can’t pick & choose under new norms
The Securities and Exchange Board of India’s (Sebi’s) new norms for IPO allotments could open a pandora’s box, according to top investment bankers. The regulator has done away with the procedure of discretionary allotment through a book building i...
By TNN |
MUMBAI: The Securities and Exchange Board of India���s (Sebi���s) new norms for IPO allotments could open a pandora���s box, according to top investment bankers. The regulator has done away with the procedure of discretionary allotment through a book building issue.
A lead book-runner to a public offer was (before the new Sebi norms) using his discretion to make allocation to foreign institutional investors (FIIs) and domestic institutional investors. The allocation depended on the background of the fund, its relationship with the book-runner, the quantum of money committed in the bids and regulatory norms for foreign investment.
The new rule brings in proportionate allotment. This means that those investors who have bid the highest, get a proportionate allocation of shares. This takes away the discretionary power held by the lead book-runner.
At the same time, the regulator has imposed a 10per cent margin on institutional bids. Investment bankers say this will discourage frivolous bidding by institutional investors. However, the move may discourage pension funds and long-term investors. Investment bankers point out that long-term investors like pension funds and investment trusts in the US will not be able to commit an upfront cash payment.
���US regulations do not permit any payment of upfront cash for investment trusts and pension funds. This will put them off. Sebi may have to look into their concern,��� another investment banker pointed out.
A lead book-runner to a public offer was (before the new Sebi norms) using his discretion to make allocation to foreign institutional investors (FIIs) and domestic institutional investors. The allocation depended on the background of the fund, its relationship with the book-runner, the quantum of money committed in the bids and regulatory norms for foreign investment.
The new rule brings in proportionate allotment. This means that those investors who have bid the highest, get a proportionate allocation of shares. This takes away the discretionary power held by the lead book-runner.
At the same time, the regulator has imposed a 10per cent margin on institutional bids. Investment bankers say this will discourage frivolous bidding by institutional investors. However, the move may discourage pension funds and long-term investors. Investment bankers point out that long-term investors like pension funds and investment trusts in the US will not be able to commit an upfront cash payment.
���US regulations do not permit any payment of upfront cash for investment trusts and pension funds. This will put them off. Sebi may have to look into their concern,��� another investment banker pointed out.
At the same time, market players believe that investors with lots of money may be able to get a higher allocation. However, they may not be long-only investors. ���The upfront margin payment will also put off hedge funds,��� the banker added.
Some investment bankers feel that the price formation process may be disrupted. ���Given the 10per cent margin and the scrapping of proportionate allocation, no institutional investor will put money except on the last day. Retail investors will thus have no clue about how to bid. As a consequence, the IPO price will be forced down, which is good for investors but bad for the issuer,��� said an investment banker.
Currently, the first day of the bidding process sees an issue getting oversubscribed several times. ���Since there was no margin money to be paid, there was an element of frivolous bidding to dictate the price trend,��� an investment banker said. Domestic mutual funds will be pleased with the Sebi decision.
A fund manager at a leading MF said that invariably, local investors lose out to foreign investors in a discretionary allocation process. ���The reservation will allow access to local funds,��� the fund manager pointed out.
Investment bankers said the regulator needs to hear out concerns of all institutional investors once again on the issue. ���Domestic mutual funds can communicate with Sebi. However, those based outside India have to be heard too,��� the banker said.
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