Publication: Capital Market, April 2010
Article Summary: This article examines the regulatory change introduced by SEBI mandating 100% upfront payment of application money for all categories of investors in IPOs, FPOs, and rights issues. Institutional investors were previously allowed to pay only 10% at the time of application, with the balance payable upon allotment. The revised rule established parity between retail and institutional investors by effectively curbing the practices such as multiple bidding and artificial inflation of demand in IPOs by Qualified Institutional Buyers (QIBs).
The article analyses how earlier trend of over-subscription by institutional investors often created misleading signals regarding issue quality, influencing retail participation. By requiring full upfront payment, the new norm improved credibility of demand and reduced speculative bidding.
This shift also led to liquidity constraints for institutional investors, as funds get blocked for extended periods. To mitigate this, SEBI extended the ASBA mechanism to institutional investors, allowing funds to remain in bank accounts while being blocked, thereby preserving interest income.
Key Insight: Mandating full upfront payment enhances transparency in IPO demand but may reduce institutional participation by increasing liquidity constraints.