Why India’s Retail Investors May Feel Left Out Amid Tech IPO Frenzy

India is witnessing an initial public offering frenzy, dominated by new-age tech businesses as the pandemic accelerated digital demand. But the nation’s retail investors may feel squeezed out as they get only a small share of the spoils in the primary markets in such issues.

On an average, about a quarter of the total retail applicants receive minimum allotment of shares in IPOs, according to data shared by PrimeDatabase. In the hottest tech IPOs lined up this year, that may even fall further because of lower allocation thresholds. As seen in the six offers last year of new-age firms where 0.9% to 6% of small investors—those buying stock worth less than Rs 2 lakh—were allotted shares.

Applicants who lose out are left with the option of buying in the secondary market, where prices may be higher than the IPO issue price. The chances of such disappointment have increased with record demat accounts opened in the last fiscal and a new breed of retail investors that have piled directly into stocks to ride the unprecedented rebound during the pandemic.

Retail demand in general has been high in the past year. In the 30 initial public offers in 2020-21 fiscal, Indian companies raised about Rs 31,267 crore, according to data from PrimeDatabase. The retail portion was subscribed 26.4 times on average. Nearly 18 IPOs saw more than 10 lakh applications in the retail category.

It’s not that IPOs are allocating less than what regulations earmark for retail investors. Indian rules set aside shares in an IPO based on financial thresholds.

In a book-building issue for firms meeting certain financial thresholds, the allocation (net of portion reserved) should be:

• Not less than 35% to retail individual investors.
• Not less than 15% to non-institutional investors.
• Not more than 50% to qualified institutional buyers, 5% of which shall be allocated to mutual funds.

The unsubscribed portion of retail or non-institutions can be allocated to other categories.

If the issuer does not satisfy financial thresholds, like new-age tech firms that are yet to report profits, allocation (excluding reserved portion) should be:

• Not more than 10% to retail individual investors.
• Not more than 15% non-institutional investors.
• Not less than 75% to qualified institutional buyers, 5% of which shall be allocated to mutual funds.

In a book-building offer, the issuer may allocate up to 60% of the portion set aside for qualified institutional buyers to anchor investors. The anchor allotment happens a day prior to the IPO and is locked in for 30 days from the date of allotment. And a third of it is reserved for domestic mutual funds.

The retail allocation, however, is not linked to any benchmarks. And for firms not meeting financial thresholds, it’s way lower than the overall market ownership of the category.

According to data by the National Stock Exchange, direct retail ownership of firms listed on the bourse has fallen from about 18-19% of total equity of a company in 2001 to about 8-9% in 2012. It has since remained stable at that level. It rose to about 9% as of December 2020 from 8.4% a year earlier as number of retail investors rose during the pandemic.

If total retail ownership in outstanding shares is a benchmark, as some argue, then the retail share in IPOs should almost quadruple. But shares offered in the IPOs represent public float. According to the NSE data, the average share of small investors in public float companies listed on the NSE stood at 17.9% as of December 2020. That’s twice the IPO retail allocation.

There is a case for arguing that the reservation should equate with this number, Amit Tandon, founder and managing director at proxy advisory firm Institutional Investor Advisory Services, said. “In other words, ignore the IPO size, focus on the total shares outstanding on listing. We need a far more robust price-discovery mechanism.”

But there is a counter view as well.

“I do not agree that retail reservations should reflect retail shareholdings of existing companies as existing listed companies reflect shareholding pattern after considerable period,” said JN Gupta, managing director at Stakeholder Empowerment Services, also a proxy advisory firm. Over last two decades, he said, it has been the regulator’s endeavour to reduce risk for retail and encourage their participation through institutional route (like mutual funds).

While direct investing is fraught with risk for retail investors even the market regulator has acknowledged preference for it. Withdrawals from mutual funds during the pandemic “could be indicative of a trend of individual investors using funds previously dedicated for systematic investment plans to invest directly into the market or in other assets such as debt/real estate or even possibly holding out in cash waiting for market corrections,” Ajay Tyagi, chairman of the Securities and Exchange Board of India, said in February.

And this breed of investors is ruing the limited allocation during the six new-age IPOs so far that not only received huge demand but shares also surged after listing.

While 0.9% to 6.1% of the retail applications received minimum shares in these offers, anchor investors got 45% of the total issue size in the six offers. Meaning, the issuers and bankers provided the maximum limit of 60% of the QIB portion to the anchor investors.