There is some good news for investors. The market regulator Securities and Exchange Board of India (SEBI) has issued a discussion paper on public issues, defining an individual investor for public issues. The discussion paper suggests the current investment limit of Rs 1 lakh for individual investors be enhanced to Rs 2 lakhs. It proposes changes to the Issue of Capital and Disclosure Requirements Regulations 2009.
Previously, individual investors in a public issue were defined as:
Fixed price issue: Individual investor is one who applies for allotment equal to or less than 10 marketable lots.
Book built issue: Individual Investor is one who applies for up to 1,000 securities.
This definition of an individual investor did not differentiate between an individual investor who applies for 1,000 shares of Rs 530 each and one who applies for 1,000 shares of Rs10 each.
It was decided to define an individual investor on the basis of amount applied for, instead of the number of shares applied for, and the guidelines were amended in August 2003 to provide that an individual investor is an investor who applies or bids for securities of a value of not more than Rs 50,000.
This limit of Rs 50,000 was found to be too low particularly in the context of large size book-built issues and also resulted in higher transaction costs. In view of this, in March 2005, the guidelines were amended to enhance the limit from Rs 50,000 to Rs 1 lakh.
This stipulation has now been incorporated in the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009. Now, it has been felt by SEBI that the limit of Rs 1 lakh for defining an individual investor needs to be enhanced.
What promoted the enhancement:
Large application amounts
It has been observed that in the recent public offerings, approximately 75 percent of applications in the individual investor category have come in the size of Rs 80,000 to Rs 1 lakh.
In the non-institutional investor category, the number of applications in the size of less than Rs 5 lakhs is negligible. This suggests that individual investors who have the capacity and appetite to apply for securities worth more than Rs 1 lakh were constrained from doing so because of the Rs 1 lakh limit. They could not make an application under the non-institutional investor category because the allocation there is limited to 15 percent as against the 35 percent for the individual investor category.
Allocation ratio
Under the Issue of Capital and Disclosure Requirements Regulations 2009, since 35 percent of a public issue is to be allocated to individual investors, in a large-sized public issue (for example, for an issue size of Rs 4,000 crores to Rs 6,000 crores), the limit of Rs 1 lakh means the issue has to receive a minimum of 1.5-2 lakh applications from individual investors to fill in the 35 percent allocation. This could be a daunting task considering that in case of welloversubscribed issues, the number of applications received from individual investors was in the range of 35,000 to 70,000.
Inflation impact
The rate of inflation has increased from about four percent in 2005 to about 12 percent currently, measured in terms of the Wholesale Price Index. In the same period, the BSE Sensex has risen from about 8,000 points to about 18,000 points. This means individual investors now buy a lesser number of securities with Rs 1 lakh than they would have bought with the same amount in 2005.
Leverage for individuals
In case the proposal is accepted, it will give more leverage to individual investors to invest in initial public offers. The move will increase their participation, especially in large offers. The small investor (applying for less than Rs 1 lakh) need not worry about being crowded out, as public issue allotments are made on a pro-rata basis.
Those who want to invest more than Rs 1 lakh are put in the bracket of high net worth individuals. This category oversubscribes most of the time.
