The multiple-times oversubscription of share sale offers of companies looking to list on the exchanges for the first time boggles the mind and defies logic. Almost every initial public offer (IPO), which is how the first share sale offers are called, is generating some kind of frenzy as if they are a sure-shot way of hitting the treasure trove. Sample this: Zomato’s IPO got subscribed 38 times, Paras Defense 304 times, Tatva Chintan Pharma 180 times, Rolex Ring 180 times and so on. While some of the frenzy is partly because of the bull run that the equity markets have seen over the past 18-20 months, it is also because of the inherent ways in which the IPO allocation and funding process work.
The regulators seem to be worried about the ‘unhealthy’ practice of creating hysteria around an IPO, and that is why they are trying to make some systemic changes to check the practice. The RBI’s recent diktat on putting a cap of Rs 1 crore on NBFCs funding IPO purchase per investor seems to be one of such moves. While banks already have a cap of Rs 10 lakh, NBFCs did not have any. As is the practice, high net worth individuals (HNIs) can apply for IPOs by paying just 1% of the application amount and the rest by taking a loan from NBFCs. So, if an HNI wants to apply for Rs 100 crore worth of IPO, all she needs to do is pay Rs 1 crore from her pocket and the rest Rs 99 crore can be financed by NBFCs. This leads to oversubscription of shares allotted for the HNI category. This sends out a message to retail investors that the IPO is very lucrative and then they also go on an overdrive to own the shares.
The capital market regulator also has a few tricks up its sleeves to mellow down the hysteria around IPOs. It has recently proposed discontinuation of the proportionate allotment for the HNI category and introduction of draw of lots allotment as is currently applicable for retail investors. The new RBI regulation and the proposed rule by the Sebi might help neutralise the IPO market, which seems to be on steroids.