QIPs to pay full money upfront for IPOs

Move aimed at a level playing field between retail investors and institutions.

The Securities and Exchange Board of India as decided to make it mandatory for qualified institutional investors to make full payments upfront when they apply for shares in initial public offers.

At present, QIPs pay only 10 per cent of the amount required for the shares for which they apply upfront. Given that retail investors have to pay the full amount with their applications, the move aims to establish a level playing field between the two classes of investors.

The system also hindered efficient price discovery since retail investors tended to be influenced by QIP participation, which was often high because of the low fund commitment.

The move was initiated by Sebi chairman C B Bhave a year ago but was not implemented because the IPO market dried up. Sebi has now decided to implement it, since the primary market is showing signs of revival.

Sebi had earlier reduced the timing between closure of an issue and allotment from three weeks to a fortnight, by offering retail investors a facility under which money would be debited from their bank accounts only when the shares are allotted and only to the extent of the allotment. Investors' bank accounts, however, will be frozen to the extent of shares applied for.

Sebi had earlier said the facility offered to retail investors would be tested and then extended to QIPs but this never occurred because no big IPO came to market after that.

An investment banker on condition of anonymity, however, said the move might not be prudent because the practice of part-payment for IPOs was a global practice. In overseas markets, however, the time lag between the closure of an issue and allotment was barely a few days, compared to a fortnight in India.

The Sebi move has acquired urgency as in the four weeks since the new government took charge, the stock market has seen a quick revival in sentiment. The benchmark Bombay Stock Exchange Sensex has risen around 25 per cent in that time.

Over Rs 40,000 crore (Rs 400 billion) worth of QIP deals are in the pipeline. Though no big IPOs have been announced so far, experts like Prithvi Haldea of Prime Database said most companies and merchant banks were waiting for markets to stabilise before they announced plans.

"The momentum is back in the secondary market, but the primary market is expected to revive from August," said Abhay Bhalerao, director, Equirus Capital.