October 25, 2010

life in financial markets: regressive impact of sebi raising retail investor limit from rs 1 lakh to rs 2 lakh

Sebi chairman, C.B. Bhave, does not always understand the real technicalities operating in the securities market and the regulatory institution he heads, Sebi, obnoxiously relies on the lobbying pressure from the large intermediaries.

The board of Sebi today modified the definition of retail investor in the process of public issue of securities. Earlier, investors putting in application, in an initial public offer (IPO) or follow on public offer (FPO) upto an amount of Rs 1 lakh was considered as a retail investor and a 35% reservation was applied for retail investors. Today, the Sebi board has amended the public issue norms to define retail investor as one who invests upto Rs 2 lakh in an IPO or FPO.

In the press conference held today, Bhave said the move was due to incidents of public issues where retail quota was not fully subscribed. I find that a bad justification. If the retail quota is not fully subscribed and other quotas of HNI (high networth investors), QIB (qualified institutional buyers or institutional investors) are getting oversubscribed then the solution simply lies in transfering the un-subscribed retail quota portion to HNI and QIB. If the latter two also sees no full subscription then whether the retail investor definition if that of Rs 1 lakh or Rs 2 lakh does not matter anyway.

Bhave and Sebi can be really un-wise at times.

Here is also what Prithvi Haldea, managing director-cum-owner of Prime Database, a public issue data specialist had to say about today's Sebi move:

"This decision will surely lead to edging out the small investors. First-time investors typically  enter in a testing mode with  small amounts. This is also true for  lakhs of existing  small investors. With the investment limit  increased  to Rs 2 lakh, the richer individual investors, courtesy proportionate allotment, will further eat into the allocation to the small investors, resulting in huge disappointment due small or nil allotments. If the regulator is keen to  increase the retail investor base,  it should rather increase the reservation for retail investors from 35% to 60-70%, with a provision to allot unsubscribed portion to the QIBs.If the retail investor definition is indeed upped, the least we we should then have is full allotments in this category from bottom up.
This policy is wrongly based around the concern that large IPOs may not elicit sufficient retail response, and upping the cap would ensure richer individuals fulfill the quota. Coal India IPO has yet again demolished this myth. Good companies with right price will always see phenomenal response from the retail.Why should any one be bothered if the retail portion goes undersubscribed in bad issues; it should actually make every one happy.
Inflation as a reason for increasing the limit is also not tenable. As the investible income has not grown in the same proportion as the inflation, it actually means lesser monies available in the hands of the small investors, and not the other way around."