The Securities and Exchange Board of India (Sebi) is readying grounds for next set of reforms in the primary market. Higher reservations for mutual funds (MFs) in Initial Public Offers (IPOs), bringing the CPSE ETF under the IPO fold and further tweaks to the anchor investor allotment process, besides shortening of the IPO timeline are some of the key changes that are being considered by the market regulator, said people involved in the discussion.
Ajay Tyagi, chairman, Sebi has called upon a meeting of select investment banks and industry body Association of Investment Bankers of India (AIBI) on April 18 to get more suggestions on board. The meeting -first formal interaction between the new Sebi chief and investment banking community-was earlier scheduled for April 3, however, got pushed by two weeks.
The proposal to provide higher reservations for MFs in the anchor and qualified institutional buyers (QIBs) portion of a public offering comes at a time when there has been a sharp monthly increase in investor inflows into equity funds. Currently, MFs have 30 per cent reservations in the QIB quota. Up to 60 per cent of the QIB quota can be used for anchor allotment.
"A lot of retail investors are taking the MF route instead of director equity investing. Therefore, we are pitching for higher reservations for domestic mutual funds," said an investment banker, who would be part of the meeting.
Among the other things that are likely to be discussed at the meeting is to allow IPO-like marketing of the CPSE ETF. Currently, ETFs are treated like mutual fund products and hence, are sold in form of a new fund offer (NFO) or further fund offer (FFO). Bringing ETFs under the IPO fold will increase investor interest and result in greater participation, bankers are likely to tell Sebi. The government is likely to launch a new CPSE ETF in the next few months.
Besides, investment bankers are planning to ask Sebi to ease the allotment process for anchor investors. Currently, the anchor allotment takes places a day before an IPO opens, while the anchor refund process happens with other investors. More importantly, the so-called ASBA facility (where the application amount stays blocked in the bank account till the time of allotment) is not available to anchor investors. "An anchor investor applies for say Rs 100 crore worth of shares but he gets allotment for only Rs 30 crore worth of shares. The balance Rs 70 crore remains stuck for at least a week. We want Sebi to look into this aspect," explained a banker.
Lack of primary fund raising through IPOs is another important aspect that is likely to get discussed at the meeting. For instance, fund raised by way of IPOs hit a six year high of Rs 28,220 crore in 2016-17, however, less than a third of it was fresh equity issuance.
"We are witnessing companies that had raised pre-IPO capital from private equity investors are mostly coming to the market to provide exits to those investors. There are a lot of companies outside this universe, which need growth funds. Maybe, they are not completely aware of the benefits of capital market," said Mahavir Lunawat, managing director, Pantomath Advisory Services.
Investment bankers are likely to discuss difficulties faced in IPOs of loss-making companies. As per Sebi rules, a company with no operating profit track record in the last three years has to have at least 75 per cent QIB subscription.
"A lot of institutional investors are averse to investing in small-ticket IPOs. So getting 75 per cent QIB subscription becomes a problem in IPOs of small companies. We either want Sebi to ease this norm or expand the definition of QIBs to include ultra-rich investors or portfolio managers," said an investment banker asking not to be named.
Investment bankers are also likely to give suggestions for bringing down the IPO timeline for current six working days and also reducing the IPO period from current three days to perhaps two days. Sebi and Reserve Bank of India (RBI) will have to work together if the IPO timeline has to be reduced further, as the proposal will require investors giving power of attorney to brokers to deduct funds. This will help do away with physical application in IPOs-a move necessary to bring down the time taken for an IPO to close and the company to list.