about 4 months ago
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Institutional IPOs. That’s what SEBI is mulling.

This is an IPO where only the Institutions participate, there is no ‘Retail’ portion reserved at all, though it does plan to reserve some portion for HNIs.  Currently, we have two categories apart from the promoters – Institutional and non-institutional. In institutional, we have FIIs, Mutual funds, insurance companies, banks, domestic institutions and not more than 50% of the IPO is reserved for this category. There are also the Anchor Investors and they are allotted 60% of the institutional investors quota.

The non-institutional portion comprises of HNIs who invest more than Rs.2 lakhs in the IPO and the rest, who invest lesser than Rs.2 lakhs are the retail investors. Usually, 35% of the IPO is reserved for non-institutional.

And what SEBI is looking at is something like a Qualified Institutional Placement (QIP) but QIP is usually of a listed company and this proposal is for companies to be listed. Like QIPs, there might be rules – presence of at least 2 institutions if the issue size if less than Rs.250 and 5 if more than Rs.250 crore – no single institution is allowed to corner more than 50% of the issue.

There is nothing on paper yet, but SEBI is thinking of this option of institutional investor only IPO, banning direct retain participation and putting in mandatory safety net. It also raises the question - will such 'institutional IPOs' be listed under a separate category? And if gets listed like all, then can retail investors participate? But then wont it mean cheating retail investors out of the option of getting shares cheaper?

These measures are being contemplated as the likes of Zomato are expected to take the IPO markets by storm in the months to come. Zomato is a loss-making company yet has a huge brand equity. SEBI’s contention is that allowing loss making companies to go for an IPO will put retail investors at a risk. And its not just Zomato, there are others too like Grofers, PhonePe, Aadhar Housing and many more star-ups are waiting in the sidelines for an IPO.

And the one fact common with all of them is that most of them are big on brand equity but burning cash and far from being profitable. Thus the pondering by SEBI whether it needs to paly Big Daddy and keep retail investors completely away from such loss-making start-ups.

It’s a good thought but anything overprotective is always wrong. Instead of banning them completely, SEBI probably needs to come with a system of marking them as “high risk” and like the ugly pictures on cigarette packets, highlight the risks to educate gullible investors. Or maybe, like Just Dial, insist on a safety net wherein if the share tanks on listing, retail investors were to be compensated.

Putting a blanket ban will be unfair; infact it will lead to more manipulation by the institutions when retail investors do get in eventually via HNIs quota or via a mutual fund. And retail investors being left out of juicy IPOs – that’s not done!

Every IPO, be it loss making or profit making, everyone needs to make a judicious call, do their own due diligence. Start-ups going for IPOs might be loss making but investors are putting in money on the future potential – isn’t what they are doing right now on the stock markets – putting money on the hope that things will only get better as basic conviction remains strong.

So, what do you think - institutional IPOs, yes or no?

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