By following SEBI’s guidelines, only 39% of applicants under the retail category got 20 shares each in the CARE IPO while 61% of the applicants, including number of those who applied for the maximum permitted under this category and blocked a sizable amount of Rs1.95 lakh were totally disappointed

The recent initial public offering (IPO) of Credit Analysis and Research (CARE) was oversubscribed 34.11 times. The retail portion was oversubscribed to the tune of 6.11 times but after technical rejections the oversubscription came down to 5.98 times. There were 3.26 lakh individual applicants applying for a total of 1.54 crore shares against the total number of 25.2 lakh shares earmarked for the retail investors. The non-institutional portion of the issue was oversubscribed 110.12 times with 476 applicants applying for 11.9 crore shares against 10.8 lakh equity shares earmarked for them.
 

The basis of allotment finalized by the company said to be in consultation with the BSE caused deep disappointment among retail investors for the following reasons.
 

Allotment to retail investors:
 

The entire retail allotment was decided by drawing of lots in the ratio of 101allottes to 256 applicants (i.e.101:256) and each successful applicant was allotted 20 shares. This meant that all applicants, from those who applied for 20 shares (investing a total amount of Rs15,000 per application) right up to those who applied for 260 shares (investing a total amount of Rs1.95 lakh per application, which was the maximum permitted under retail category) were treated alike and they were all considered for allotment on the basis of a lottery irrespective of the number of shares applied for. And every one who was successful in the lots was allotted only 20 shares. This was blatantly unfair to a large number of applicants who had blocked substantial amount of money for over 15 days.
 

Till recently, when the issue was oversubscribed, the number of shares to be allotted to the eligible applicants would be arrived at on a proportionate basis, which is total number of equity shares applied for by each applicant divided by the level of the over-subscription in that category. But in August 2012, the Securities and Exchange Board of India (SEBI) came out with fresh guidelines in respect of retail investors, according to which when the issue is oversubscribed every retail applicant irrespective of the size of his application gets a minimum bid allotted—subject to availability of shares in aggregate. In other words, all the investors under that category will be covered by a lottery and the winners will be allotted only the minimum lot of shares, as decided by the company.  
 

By following the above method in the subject issue, only 39% of applicants under the retail category got 20 shares each and the balance 61% of the applicants, including number of those who applied for the maximum permitted under this category and blocked a sizable amount of Rs1.95 lakh were totally disappointed, as they did not get any allotment, while under the old system they would have got at least some shares on the basis of proportionate allotment.
 

While the intention of SEBI in making this change was to provide maximum opportunity for small investors to get allotment in new issues, but by doing so, it completely took away the incentive for middle-class investors to invest in IPOs.
 

In the case of CARE, if the proportionate allotment system was followed everyone who applied for shares in excess of 120 shares would have got a firm allotment on a proportionate basis, which is number of shares applied for divided by the number of times oversubscribed, i.e. 5.98. An applicant who has made an application for 260 shares, which is the maximum that can be applied under retail quota, (there were 21,031 applicants) should have been allotted 43 shares on a proportionate basis. The lots system should have been followed only for those who have applied for 100 shares and less, as they can be allotted a minimum of 20 shares only by lots because of the company’s stipulation that the minimum allotment will be for 20 shares.  
 

Allotment to non-institutional bidders:
 

This portion of the issue was oversubscribed by 110.12 times and allotment has been made on a proportionate basis to all those who have applied for 2,160 shares and above. And those who have applied for less than 2,100 shares have been allotted a minimum of 20 shares on the basis of lots but on different ratios. This has given rise to several anomalies, as certain applicants got firm allotment of 20 shares, while many others who have applied for a higher number of shares have not got any shares as they were covered under the lots system. For example, a person who has applied for 360 shares has been allotted 20 shares on firm allotment basis, while those who have applied for 400 shares have a chance of getting 20 shares on the basis of lots in the ratio of 3:16.  Several such anomalies are observed under this category.  
 

In the case of QIBs (qualified institutional buyers) only proportionate allotment has been made, and this system should have been followed uniformly for all investors from the sake of fair play.  
 

Why this variation in allotment system to different investors?
 

From the above it is clear that no uniform system has been followed for allotment of shares and different systems have been followed for different categories of investors, thereby defeating the very objective of fair and equitable allotment required to be made whenever there is oversubscription. The entire allotment system followed in this case appears to be unfair and unjust to all individual investors who do not have any say in these matters. The system as it stands today is totally biased in favour of the domestic and foreign institutional investors, who corner a substantial chunk of the issue at the cost of the retail and individual investors because of the lop-sided allotment system introduced by the regulators.
 

SEBI to ensure fair treatment of all investors:
 

SEBI, in its irrational exuberance made these changes without understanding the implications of such a change, as the changes have not worked to the benefit of a large number of middle-class investors. In order to create a level playing field and to provide an equal share of the public issue to the individual investors, there is a need to overhaul the entire allotment system, and the following suggestions are made for the consideration of SEBI.
 

1. At present 35% of the public issue is earmarked for retail investors and the maximum amount per application is fixed at Rs2 lakh.  To meet the aspirations of small investors, SEBI should make the following three changes under this category of investors: 

a) First, the share of public issue available for retail investors should be increased to 50% of the issue from the existing 35%;         
                                                                             

b) second, within this 50%, a submit limit of 15% should be earmarked for micro investors, that is applicants who apply for shares worth up to Rs50,000, which is the limit prescribed under the Rajiv Gandhi Equity Savings Scheme (RGESS) introduced recently to avail tax benefits under the scheme. This will help small investors to get a slice of the cake too and serve the purpose of getting their participation in IPOs; and
 

c) third, the maximum limit of Rs2 lakh under retail category should be raised to Rs3 lakh to cover a larger number of middle-class investors under this category. After earmarking 15% to micro investors as stated above, the rest 35% of the public issue should be made available for these retail applicants who apply for shares worth from Rs50,001 to  Rs3 lakh. This will provide a fair and equitable allotment of shares to all class of investors, without unduly favouring any category of investors.
 

2. For non-institutional investors, the present allocation is 15% of the issue. This should be enhanced to 20% with a proviso, that 5% of this should be made available for individual investors in this category and the rest 15% be made available to non-institutional corporate investors.
 

3. At present QIPs comprising both domestic and foreign institutional investors virtually corner the allotment as they have 50% allocation earmarked for them. This should be reduced to 30% of the issue, thereby giving better representation to retail and individual investors to a reasonable extent. However, the unsubscribed portion, if any, in other category of investors would naturally be available for allotment to QIPs as at present.
 

4. All allotments should be on a proportionate basis, except those applications falling within the minimum lot of shares to be allotted as decided by SEBI and not by the company. Besides, the entire allotment system should be clearly laid down by SEBI, without giving any discretion to the company, merchant bankers or to stock exchange, as there should be complete uniformity and fairness in allotment in all public issues without exception.
 

It is all the more necessary to make these changes, as the government has introduced the RGSS Scheme to attract small investors into the capital market, and SEBI too should take these matching steps to encourage small investors to participate in the capital market. Therefore, SEBI should come out with revised guidelines in respect of allotment of shares as stated above to sustain the interest of the retail investors in the initial public offerings that may hit the market in the near future.
 

(The author is a finance professional and writes for Moneylife under the pen-name ‘Gurpur’)