Dual float: Govt may allow 2-way flow of unsold shares

NEW DELHI: The draft norms for simultaneous equity issues in local and international markets provide a flowback of shares from one market to another in case of under-subscription.
The draft format for dual listing has the potential of making markets fungible, besides changing the face of domestic primary and secondary markets. But some provisions could make the stock markets more illiquid too.
The draft norms, which have been prepared by a sub-committee set up by the Securities and Exchange Board of India, have been sent to the Association of Merchant Bankers of India (Ambi) for its comments. According to the draft norms, the minimum offer for local shares will be as per the current Sebi norms of 10% for TMT companies and 25% for the rest.
However, the flowback provisions have the potential to create illiquidity in the domestic market, as the float gets split between two markets and a stock gets listed without requisite liquidity, which may then lead to price manipulations.
Also, as larger institutional demand goes to the international markets, Indian retail investors will get liquidity only from residual allocation in India. The draft norms also suggest that there should be uniform disclosure requirements by co-ordinating with both Sebi and the US Securities and Exchange Board of India, along with two offer documents. It is proposed to have a common book-building in both the markets, which would be kept confidential.
A price range will be provided instead of the price floor in the issue prospectus as is the case now. In what could turn to be a contentious proposal, it is said that minimum subscription will be calculated after considering subscription in both offers. This could mean that the bulk of the issue is outside. At the post-listing stage and thereafter, this kind of fungibility can also impact volumes in the Indian secondary markets. Today, almost 15% of all trades are delivery trades and of this 10% are by FIIs. Once FIIs shift outside at the time of the IPO, their buying will be typically in the international markets thereby impacting liquidity including non-delivery based trade.
As per the draft norms, an option will be given to eligible investors to spill over their bids from one market to another. One implication of this could be that FIIs may prefer to put their demand in the international leg thus reducing institutional demand for the Indian leg.
The norms propose that there will be a common pricing in both markets and also a greenshoe option at the time of closing the offering with a view to stabilise the after-market price. However, in some scenarios, retail investors may have to receive shares at a higher price as FIIs bidding abroad may be willing to pay a premium. In most IPOs, retail investors bid on the basis of institutional demand either by indicating a price or cut-off.
A minimum allocation to individual investor categories and 25% to retail investors will be done on the basis of final offering size.
There will be a research blackout as per international practice where no research will be published and distributed 2 weeks prior to commencement of road shows and up to 40 days after closing.