Double Quota for Mutual Funds in IPOs, says Assocham

The Associated Chambers of Commerce and Industry of India (Assocham) has recommended to the Securities and Exchange Board of India (SEBI) to double the quota reserved for mutual funds in IPOs from current level of 5 per cent to at least 10 per cent.

In a communication to SEBI, ASSOCHAM Capital Markets Committee pointed out that at present 35 per cent of shares are reserved for retail investors, 15 per cent for high net worth individuals/corporates and 50 per cent for qualified institutional buyers (QIBs). Within the QIB quota, 5 per cent is reserved for mutual funds.

In August 2005, with the objective of promoting investments by individual investors through the mutual fund route, SEBI had mandated that 5 per cent of the 50 per cent QIB quota i.e. 5 per cent of the issue size would be reserved for mutual funds. In addition, they were allowed to compete for allocations on a proportionate basis in the balance 45 per cent quota.

A Study by Prime Database and Assocham of all 40 IPOs between April and December 2006 reveals that mutual funds have demonstrated a huge appetite for IPOs. In as many as 32 of these, they subscribed heavily and not only used up their 5 per cent quota but were also able to extract significant allocations from the balance QIB quota.

According to Assocham, “the time is now ripe for upping the quota for mutual funds. Any increase in this quota is indirectly an increase for the small investors and would help in mobilizing more household savings for the capital market.

“On the other hand, mutual fund investments in IPOs are long-term in nature and as such are ideally suited for the retail investors. Greater holdings by funds would also reduce the post-listing volatility. Significantly, mutual funds would be able to provide the benefits of IPOs to investors who normally fail to obtain allotments in oversubscribed issues. Many investors give IPOs a miss because of the operational hassles and the uncertainty on allotments.”

The increase in mutual funds quota, argues Assocham, should come out of the QIB and not the retail quota. The present allocation should be increased to 10 to 15 % from the present 5 %. For PSU IPOs, in specific, the entire QIB quota should be reserved for the domestic QIBs.

Reservations are critical as there is presently not a level playing field and the domestic investors cannot be considered at par with the trillion-rich FIIs. Our domestic funds are not strong enough and cannot therefore compete on equal footing. In reality, the fund industry in India is still small. Despite all the recent hype, mutual funds hold just 3 per cent of the total listed equities. On the other hand, in the pro-rata allotment, mutual funds are sidelined due to the sheer number of FII participants; at present, there are close to 1,100 FIIs compared to just about 30 mutual funds.

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