As IPO sizes surge, merchant bankers face challenges in attracting retail investors and seek regulatory tweaks—will SEBI redefine the rules?

• Investment bankers ask for a reduction of the quota for retail investors in IPOs
• Some bigger company issues have faced under-subscription in the retail segment
• Issue sizes have increased over the years, making retail oversubscription difficult
• A flexible approach by SEBI can help resolve the problem

Merchant bankers operating in the primary market have experienced a good run over the past few years. Excluding the last six months, mainboard merchant bankers and those serving the SME (small and medium enterprises) segment have performed well.

In the mainboard market, various investors participate, including retail investors, high-net-worth individuals (HNIs), and both domestic and foreign investors. In contrast, the SME segment primarily attracts retail investors and HNIs.

Bankers' roles in assisting companies in raising funds go beyond completing the necessary paperwork and obtaining clearance from regulatory authorities. They are also responsible for encouraging investors to subscribe to the issue. Most bankers successfully attract investors from their personal networks in the SME segment. However, raising funds from the retail segment is often more challenging for larger companies.

Bankers find it easier and less expensive to reach institutional investors and HNIs. However, selling an IPO to retail investors can be challenging, especially when the issue size is large.

According to SEBI regulations, 35 percent of an IPO is reserved for retail investors, while institutional buyers receive 50 percent, and non-institutional investors (NIIs), including HNIs, are allocated 15 percent.

The main issue facing the investment banker is not related to the devolution of the offering. Even if the retail portion is undersubscribed, spillover is permitted to another segment. However, spillover is not allowed if the institutional segment is not fully subscribed.

If the issue fails to achieve the minimum subscription level of 90%, the issuer has several options: they may extend the deadline for closing the issue and lower the issue price, or they may reduce the Offer for Sale portion of the issue. If, even after taking these measures, the issue remains undersubscribed, the issuer is required to return the entire subscription amount to all investors, resulting in the cancellation of the issue.

For a banker, the unsubscribed portion in the retail segment is not a deal breaker; it is often seen as a loss of face. A company that fails to attract enough subscribers is generally viewed unfavourably in the market. Among the five companies that did not fully subscribe from retail investors, four are currently trading below their offer price, while the fifth is trading close to it.

Companies like Tata Capital, LG Electronics India, HDB Financials, ICICI Prudential AMC, Lenskart, Manipal Hospital, and PhonePe plan to raise over $1 billion (approximately Rs 8,500 crore) each from the market. Raising funds from the retail segment in such cases may prove to be both challenging and expensive.

The regulator can adopt a flexible approach, particularly for larger IPOs, such as those valued over Rs 5,000 crore, rather than implementing a one-size-fits-all rule for all offerings. Additionally, a SEBI report revealed that two-thirds of individual investors participate in IPOs primarily for listing gains. Therefore, imposing stringent rules on a group of investors who are not focused on the long-term prospects of the company does not make sense.