The Securities & Exchange Board of India plans to increase the minimum application amount for public issues to 15,000 from 10,000, and make it compulsory for companies to at least allot shares worth this amount to retail investors. The move is part of a slew of measures being contemplated by the stock market regulator to revive the market for primary issues while protecting the interests of investors.

Some of the major decisions likely to be approved by the Sebi board at its August 16 meeting include increasing the minimum application amount by 50%, halving the bidding period for public offerings to five days, making the object clause of prospectuses of issuing companies more specific, and tightening guidelines for IPO-bound companies that don't have a track record of profits.

The regulator also plans to allow investors to apply for IPOs and follow-on public offers (FPOs) online, and use credit and debit cards for e-payment of application money.

Primary issues constitute an important fund-raising mechanism for companies. But subdued market conditions have resulted in 51 IPOs being called off since January 2011.

MCX's 663-crore issue is the only decent-sized public offering that has gone through in recent times.

Package of Measures Readied

The market regulator has readied a package of measures that, it hopes, will improve the quality of issues and make it attractive for retail investors to participate in IPOs, thereby giving a boost to the primary market.

Retail investors are currently allotted shares on a proportionate basis, which depends on the final size of the issue, the number of applicants and the bid size of individual investors. Sebi plans to do away with this method and proposes to allot all retail applicants shares worth the minimum application amount, which will now be Rs 15,000. This means that if an IPO is priced at Rs 100 per share, all retail investors will be issued a minimum of 150 shares, irrespective of whether they have applied for shares worth Rs 15,000 or Rs 2 lakh. The balance shares will be allotted on a proportionate basis. If the total number to be allotted is less, a lottery system will be followed. Investors whose names figure in the lottery will be allotted shares worth Rs 15,000. The rest won't get anything. Sebi also proposes to make the object clause of the issuers' prospectus more specific. In a book-build issue, general corporate expenses will not exceed 20% of the estimated issue size. At present, issuers keep a large amount under general corporate expenses to keep the issue size ambiguous.

In case the issuer adds or deletes to the object clause that changes the issue size by 20%, Sebi may ask the issuer to re-file the draft red herring prospectus.

The regulator also plans to modify the bidding period for IPOs where price discovery is done through the book-building route. At present, the period for receiving bids is a minimum of three working days and a maximum of 10 working days, including the extension due to price revision. This period will be reduced to 2-3 working days with a provision of one extension of two days irrespective of whether there is a change in the price band.

Sebi is planning tighter guidelines for large companies that don't have a track record of making profits. Such companies, which seek to issue IPOs, will now sell a minimum of 75% of the issue to qualified institutional bidders as against the current limit of 50%. Of the remaining 25%, 15% shall be allocated to non-institutional investors and the remaining to retail investors. The regulator is also planning to liberalise pricing guidelines for Qualified Institutional Placement (QIP). Companies going for QIPs will now be allowed to sell shares at a 5% discount to the average price of the previous two weeks. This will give greater flexibility to the issuing company to raise money through the QIP route, particularly in a falling market. Companies are currently not allowed to sell shares for less than the two-week average price. This has created a hurdle in pricing QIPs since the two-week average price is usually higher than the current market price in a falling market.

The market regulator is also planning to send a strong signal to Indian promoters to price issues conservatively. In case a new issue trades at 20% below the offer price for three months, the promoters (not the company) will have to mandatorily buy 5% of the issue size from original allottees whose application amount is not more than Rs 50,000.

Sebi also intends to relax the fast-track route of fund-raising for well-established and compliant companies by way of follow-on public offers and rights issues. (Economic Times)