Retail Quota In IPO

Retail Quota In IPOs - Boon Or Bane

I recently came across a news article in The Economic Times, New Delhi Edition dated Feb 6, 2006 which I quote " Quota based allotment for retail investors in public offers of equities may be on the way out, in the wake of the multiple demat account scam. The proposal is being considered by the government to root out the scope of enterprising individuals cornering large percentage of these offers. The re-look at the primary market has been prompted by the discovery of the large scale abuse of the retail quota route using multiple demat account. Since the quota has not benefited the small investors the justification for carrying on with it is limited. 'The retail quota is a relic of a control raj,' said an official connected with the process." Now, I have more then one justification to carry on with the quota system for retail investors and I feel that abolishing the quota system will seriously hurt the retail investors. For example take a look at the oversubscription figures of recently concluded IPOs.

IPO Subscription Details COMPANY NAME Retail Qualified Institutional Bidders Non-Institutional Bidders Employees Overall Entertainment Network India (Ltd) 15.7439 times. 54.2093 times. 61.1816 times. 0.6614 times. 41.11 times. Gujarat State Petronet Ltd 21.9017 times. 56.9012 times. 84.2550 times. No Quota. 48.75 times. Jagran Prakashan Ltd 6.9625 times. 16.2633 times. 23.7415 times. No Quota. 14.22 times. Inox Leisure Ltd 18.0090 times. 59.2599 times. 95.0115 times. 1.1800 times. 49.59 times.

It clearly shows that retail portion is not heavily subscribed in all the above mentioned IPOs as compared to other quotas. To be specific, Retail portion in Entertainment Network has been oversubscribed by 16 times whereas overall oversubscription is 41 times. This means that in current scenario retail investor has a probability of 1 in 16 for getting allotment whereas in the absence of quota retail investor has a probability of 1 in 41 for getting allotment. Same theory applies for all the above mentioned IPOs. Hence, retail quota system is helping retail investors in a big way and by abolishing it government will do more harm than benefit. The irony is, abolishing quota will help so called enterprising individuals cornering large percentage of these offers.

Retail investors in general will have to suffer for the wrong doing of few crooks and culpable negligency of Sebi and Depository Participants.

On the contrary, I feel that retaining retail quota and making income tax PAN mandatory for all applications will help preventing crooks and black money, entering stock markets through primary route. Simply because PAN is unique for all individuals and multiple applications can be sorted out by a single computer query.

Further, I also think that minimum lot in IPOs should be fixed at 50 shares because in some high priced IPOs if one gets 10 shares, he is not earning much, instead if someone gets minimum 50 shares atleast he will take something home.

Friends, let me know your views by posting comments or by sending an email.