COMPANY LAW
| For the sake of the retail investor Mon, 30 Aug 2010 |
| The Hindu For the sake of the retail investor Recently there has been a flurry of regulatory moves that seek to enhance the role of retail investors in the stock market. Two months ago, the government asked listed companies to keep a minimum public float of 25 per cent. Companies were given three years to comply with the new norm by offloading at least 5 per cent every year till they reach the target. Subsequently, the government exempted public sector enterprises from this stipulation. It would suffice if they keep public participation at just 10 per cent. Nevertheless, the underlying assumption behind the original stipulation of a compulsory share for the public remains — an increase in the size of the public float, it is felt, would lead to greater public participation. However well-intentioned, the new regulatory moves will not really help the cause of retail investors. In fact, it is likely that the regulators have really grasped the extent of retail investors' disillusionment with the stock markets. Official statistics consistently throw up the fact that a very small percentage of household savings find their way to the stock market. Also, the number of active individual investors has been going down. Tinkering with the regulatory rules may prove futile without addressing the genuine concerns. A recent discussion paper from the Securities and Exchange Board of India seeks to expand the definition of a retail investor by doubling the investment ceiling to Rs.2 lakh. If it is accepted, an investor can apply for shares up to Rs.2 lakh under the retail category. At present 35 per cent of a public issue is reserved for retail investors and 15 per cent for non-institutional investors, comprising high net worth individuals and so on. The present ceiling for retail investment is Rs.1 lakh. Individual applications for amounts that fall within the ceiling will be considered for allotment in the retail category. The new proposal, now open for a public discussion, has drawn support as well as criticism in equal measure. Regulator's justification In justification, SEBI says that as a result of the new rule, many more applications will be made under the retail category. According to an analysis cited by the regulator, a large portion of retail applications is for amounts ranging from Rs.80,000 to Rs.1 lakh. The retail investors will most probably submit more applications if the rules allowed them to do so in the retail category because of the larger quota for retail investors compared to the non-institutional investor category. Recent experiences with public offerings were also cited for the justification. In mega issues of the size Rs.4,000-6,000 crore, a minimum of 1.50 to 2 lakh applications will have to be procured to fill in the retail quota of 35 per cent. This will be a daunting task even for the most popular issues. The analysis draws attention to the fact that in recent times the retail investor category has not exactly flocked to the IPOs. Of the 40 odd issues that came to the market since September last, hardly four received full subscription on the retail portion. The portions reserved for qualified institutional buyers and non-institutional investors, however, were substantially oversubscribed. A specific concern has been the share offerings of public sector enterprises under the disinvestment programme. By and large these offerings have not enthused the retail investors. Many reasons have been cited. The discount to the offer price to tempt retail investors has been small and by the time of the public offer it became negligible. In the NTPC's follow-on offer in February, retail investment was at a paltry 0.16 per cent. Cynical approach The approach to a complex problem of low retail interest in the IPOs by changing the definition of a retail investor is highly cynical. How will the concerns of the really small investors be addressed? A majority of retail applications might be closer to Rs.1 lakh (as shown by the SEBI study). That might well be because the relatively smaller investors feel more alienated. The market apparatus, as it exists, is wholesale in character. Every single development that has transformed the capital market has really benefited the institutions. The use of technology, insistence on higher net worth requirements for market intermediaries and even the introduction of compulsory demat have all been steps that are perhaps overdue. Even so, the benefits have accrued to the large institutions and much less to the retail investors (at least the truly small ones). In significant ways, the upgradation of the capital market structure has widened the divide between institutional and small investors. |
Online Poll