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Institutions = Individuals, at least in IPOs


Mint reports:

Institutional investors [will] now pay 100% of the bid amount upfront while bidding in an IPO, a far cry from the days when they didn’t have to put up any margin money and allotment to them would be on a discretionary basis by merchant bankers. Some years ago, Sebi applied a 10% margin and moved the system to one of proportional allotments. The current move brings complete parity.

This has gone through some iterations:

  1. Institutions would pay nothing. They could just bid without putting a paisa down. So every one bid because it was unlikely they would ever have to actually pay up, since everything was oversubscribed 600 times or something.
  2. So SEBI got angry and said we want you to put 10% down. Institutions said, listen, this IPO business takes 45 days, okay? I’m not going to bid if I have to pay money upfront and I get almost no allocation and the money blocked gets me no interest. But SEBI said 10% is 10% boss, you want it, take, otherwise go home. Some of them went home. Most stayed but then the big crash happened, and very few IPOs actually made it through.
  3. SEBI realized the interest problem isn’t just institutional – even individuals suffer. So they created ASBA – your money stays in your bank account and earns interest while the IPO is booked. You just can’t use the money for other purposes, but at least you don’t lose the interest.
  4. Now SEBI tells institutions: Listen, you guys can’t throw us the interest argument, so pay 100%.

Like the Mint article says, during the IPO process (usually three to five days), NSE and BSE reveal the size of the IPO book (how much already subscribed per category etc.). So if there was already 200% subscription, institutions would say I want to buy 100,000 shares, so let me bid for 200,000 – at current rates I won’t get more than 1/2 of my shares anyway. The 10% margin allowed them to do that (upto 10x the quantity required) That inflated IPO books unnecessarily. Now, with 100% margin, they have to put the entire money up so this practice will be curbed.

The downside of course is that TV channels will not get to make statements like “this IPO is only 2x oversubscribed”. (1x is pretty much what people were looking for, beyond that it’s just showing off)

Mint also says the exchanges may stop reporting book sizes prior to the issue. That’s not very useful because I for one don’t want to apply to a heavily oversubscribed book. Maybe a compromise can be to only reveal information on the last day of the IPO.

This applies only to IPOs after May 1, 2010.



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