Dear Sebi, please leave India’s IPO market alone
The Securities and Exchange Board of India (Sebi), the country’s financial markets watchdog, is understood to be vexed about the lack of retail participation in two recent high-profile IPOs. But this is much ado about nothing, and it would be a mistake for the regulator to start meddling again to protect the interests of small investors.
There have been rumblings among market participants in India recently that Sebi is worried about the low level of retail demand in the listings of InterGlobe Aviation, which runs India’s biggest budget airline, and Coffee Day Enterprises, owner of a popular coffee chain.
Indeed, both listings should have been a hit with retail investors as they are not only household names but also mass market consumer brands. But both were largely shunned. InterGlobe saw retail investors subscribing for only 0.92x of the shares reserved for them, while Coffee Day closed its retail tranche 0.9x covered, and the portion for high net worth investors was just 0.5x covered.
These outcomes have led to the regulator poking its nose into the issue and wondering what went wrong.
On the face of it, there are grounds for Sebi to be concerned. The regulator has long tried to encourage retail participation in IPOs, which makes sense for a country with as large a retail base as India. And minority investors everywhere benefit from some amount of protection.
But to draw conclusions from just these two trades would be short-sighted – and a huge mistake. There were issues specific to Coffee Day and InterGlobe that made retail investors ill at ease. The former bundled together not only its coffee business, but also its technology parks, logistics, financial services and hospitality arms into the listed entity, which diluted the consumer story.
InterGlobe, on the other hand, posted a negative net worth just before launching its deal and that spooked retail investors. It didn’t help that existing aviation stocks have had a history of underperformance on the country’s bourses.
What Sebi needs to understand is that retail interest is far from gone, if fragrance maker SH Kelkar & Co’s Rp5bn float this month is any indication. All kinds of investors piled into the transaction, with the retail book alone closing 27x covered.
In addition, demand from individual investors via mutual funds is stronger than ever. Equity mutual funds saw net inflows of $9.2bn between April and October, the highest level on record over a seven month period, according to the Association of Mutual Funds in India. Rather than running for the hills, retail investors have chosen to plough their cash into professionally-managed funds.
This shows that Indian retail investors are shifting from direct to indirect exposure in equities, which will help reduce the kind of volatility that an army of small, herd-like, investors can wreak on the market. Sebi should take this as a positive sign.
No regulator should be seen as mollycoddling or favouring one type of investor over another, even if Sebi has done this in spades in the past. In 2013, it implemented a safety net mechanism that essentially gave retail investors risk-free returns in IPOs – a move which was widely panned, and eventually scrapped. To even consider reviving it would be a fallacy.
What Sebi should pay attention to is that the lack of retail interest in the recent listings was more than offset by the outpouring of demand from institutional investors. That Coffee Day and InterGlobe attracted very strong institutional interest should be a huge vote of confidence. And this is something Sebi needs to focus on, instead of getting distracted by short-term blips in the market.
If Sebi wants to make more progress as a regulator, it needs to make sure that all investors, not just retail, are winners.