Stock exchanges drag feet on transparency via SEBI rule on HNI quota

The massive influx of small-scale individual investors has been attributed as one of the main reasons for the buoyancy of the Indian stock market. But the regulatory ecosystem is dragging its feet in providing transparency in sharing of data of individual investor participation in the market.

For instance, Securities and Exchange Board of India (SEBI) introduced a new rule for allotment of shares of initial public offerings (IPOs) to non-institutional investors (NIIs), colloquially referred to as the high networth investors (HNIs). HNIs are a class of investors who apply for shares above ₹2 lakh in an IPO. Under the new rule, 5% of issuance is reserved for small size HNIs with application of less than ₹10 lakh, and 10% is for HNIs who are putting above ₹10 lakh for an IPO. Any investor who puts less than ₹2 lakh in an IPO is categorised under retail category.

Though the amendment was proposed by the regulator in October 2021 and has been implemented since April 1, 2022, till the time of writing this report, there is no transparency regarding IPO share application through this rule.

Despite the new rule dividing the category of NIIs into two sub-categories, websites of both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) do not reflect the application amount under these two categories separately. Both the exchanges are still following the old format where IPO subscription amount is disclosed only for three categories, namely institutional, non-institutional, and retail.

Through the new rule, the primary objective of SEBI was to ensure that more and more HNI investors from diverse locations of India get the opportunity to participate in IPOs. However, the lack of information in public domain leaves a question mark as to whether this rule is just an eyewash or a game-changer for the smaller HNI investors.

Only actual data regarding allocation of shares to the actual number of small-scale HNIs (below ₹10 lakh band) would be indicative of the success of the new rule in its true spirit. However, bureaucrats at the regulator and the stock exchanges appear uninterested in substantiating whether the new rules are able to create any level playing field for smaller HNIs who were repeatedly thrown out of the IPO share allocation by the heavyweight HNIs.

Fortune India enquired with SEBI, BSE and NSE as to why the exchanges are not providing information in a transparent format.

The BSE spokesperson stated in a written reply: “For non-institutional investors category, the exchanges grouped all bids from the bid value of ₹2 lakh and above to maximum permitted bid value under that category and accordingly display its bid quantity on the exchanges' website as per format provided in Schedule XIII, Part B of SEBI ICDR Regulations.”

In other words, BSE probably implies that it is implementing the rules in the allocation procedure but it is not obliged to change the format of information in the public domain, unless SEBI explicitly mandates it to do so.

NSE and SEBI chose not to reply to the questionnaire.

Their stance is also typical of service providers who monopolise a market. Since NSE and BSE are essential to the existence of the Indian stock market, they ought to provide exemplary service to their customers, especially the smaller investors. However, the exchanges do not seem to believe that it is their duty to encourage and support retail investors by proactively ensuring transparency of data and information.

Why the new rule was introduced?

SEBI had received a barrage of complaints that large HNIs were crowding out smaller ones during allotment of NII shares in an IPO. In October 2021, SEBI released a consultation paper in which, an analysis of oversubscribed IPOs, between January 2018 and April 2021, showed that in the case of 29 IPOs, on an average around, 60% of the applicants in the NII category did not get any allotment. In a few cases, applications for as large as ₹75 lakh were also unable to get allotment.

This led SEBI to conclude that the rule of proportionate allotment is resulting in a few large applications by a few NIIs grabbing all the shares allotted in the NII quota, leaving nothing for the other NIIs. Thus SEBI came up with a new rule to bring fairness into the share allotment during IPO launch.

As per the current rule, applicable from April 2022, 50% of shares offered under IPO are reserved for institutional investors, 35% for retail investors, 5% of issuance is reserved for small size HNIs with application between ₹2 lakh and ₹10 lakh, and 10% is for HNIs who are putting above ₹10 lakh for an IPO.

Why data transparency is important for this rule to operate in fairness?

In the past, HNIs with deep pockets could get most of the IPO shares allocated for NII category by bidding mammoth amounts of money through a single application. The norm of proportionate allotment of shares ensured that a few HNIs could not corner the entire allotment. It would not be far-fetched to assume that the same HNI party can apply for multiple applications of ₹10 lakh through different individuals who belong to their network.

Under such circumstances, only transparency of data can indicate whether the smaller HNIs are getting a fair chance to invest in IPOs or are they being ousted by the larger HNIs again.

If the new rule of IPO share allocation is to be successful in real spirit, the SEBI and exchanges need to keep a closer eye on details of the relevant subscribers and bring more transparency into the system by transparently putting these data sets in public domain.