This initiative aims to ensure a more transparent and fair allocation process during IPOs

In a significant move aimed at enhancing the integrity of the initial public offering (IPO) process in India, the Securities and Exchange Board of India (SEBI) is developing measures to curtail the intermingling of bids across different investor categories. This initiative addresses a longstanding issue where bids intended for specific groups, particularly employees, end up being inflated by entries from retail or non-institutional investors, leading to a high number of rejections during the allotment phase.

The Problem of Over-Subscription and Misallocated Bids

In recent times, the Indian IPO landscape has witnessed several instances where the number of applications far exceeded expectations, particularly in the employee category. A notable example was the IPO for Ideaforge Technology, where the employee quota was initially subscribed over 95 times. However, this figure dramatically dropped to just 2.36 times at the time of allotment. Such discrepancies raise concerns about the authenticity of the bids and the potential manipulation of subscription numbers, reported by The Hindu BusinessLine.

According to Pranav Haldea, Managing Director of PRIME Database, “A lot of non-employees put in applications in the employee category which results in inflated figures and bids getting rejected at the time of allotment. This puzzling scenario suggests that many retail or wealthy investors are incorrectly bidding in the wrong category.”

SEBI’s Proposed Solutions

To combat this issue, SEBI is considering a requirement for companies to submit comprehensive employee data prior to the opening of an issue. This data would ensure that only eligible employees can bid in their designated category, thus preserving the integrity of the employee quota and preventing unnecessary bid rejections.

An official familiar with the IPO process elaborated on the potential measures, stating, “At present, there is no restriction for a person to place bids in the retail, NII, or employee category. The regulator is mulling measures to prevent such inter-bidding among categories.”

Enhancements to the IPO Bidding Process

In response to these challenges, exchanges issued a circular in June regarding systemic improvements in the bidding process, particularly for SME issues. This includes the implementation of a verification process on the exchange’s book building platform, which checks applicant eligibility prior to bid acceptance in specific categories such as employee, shareholder, and policyholder based on details shared by the company or issuer a day before the issue opens.

Pranav Haldea suggests further improvements: “Stock exchanges should stop publishing subscription numbers at the time the book is being built, except maybe for qualified institutional buyers. Let the final figures come post-allotment. The entire process needs to be automated so that the work of matching the employee PAN and other details happens at the time of bidding, and not later.”

Regulatory Scrutiny and Future Policies

The need for these changes was underscored by findings from SEBI, which revealed evidence of inflated IPO application numbers in at least three instances recently. This prompted concerns about a potential repeat of the Roopal Panchal scam, which involved numerous IPO applications filed through fictitious demat accounts primarily to embellish subscription numbers.

Sebi Chairperson Madhabi Puri Buch emphasized the importance of these reforms at an industry event, stating, “The IPO applications are filed in a manner that they get rejected. This is done to make the subscription numbers look good. In the interest of investors, we will review both policy and enforcement actions in such areas.”

SEBI’s proactive stance on refining the IPO bidding process reflects its commitment to ensuring fairness and transparency in India’s capital markets. By implementing stricter controls and leveraging technology to verify bidder eligibility, SEBI aims to protect investor interests and uphold the market’s integrity. These measures, once fully realized, are expected to significantly reduce the discrepancies in subscription numbers and ensure a more equitable allocation of shares among deserving investor categories.