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Cherry-picking rooted out of share allotment

Mumbai, Aug. 26: The Securities and Exchange Board of India (Sebi) today banned the practice of discretionary share allotments in public issues to qualified institutional bidders (QIBs) even as it ordered them to stump up 10 per cent of the amount they bid upfront.

The changes in the share allotment rules are designed to quell a rising disquiet over the biased manner in which some merchant bankers have farmed out shares to institutional investors bidding in recent initial public offerings (IPOs).

The biggest change is to earmark 5 per cent for Sebi-approved mutual funds in the IPOs out of the 50 per cent quota reserved for institutional investors.

The decisions were taken today at the Sebi board’s 100th meeting, which was chaired by M. Damodaran.

“We have factored in all shades of opinion. The larger public good lies in doing away with the element of discretion,” Damodaran told reporters after the meeting.

Merchant bankers have been loathe to give up their power of discretionary allotment on the ground that it helped them sieve the long-term quality investors among institutional investors from short-term investors like hedge funds.

However, Sebi has deemed that all allotments in the QIB category will be proportionate just as it is in the case of retail investors.

Nimesh Kampani, chairman of J M Morgan Stanley told The Telegraph that Sebi’s move is actually a “blessing in disguise”.

“We faced unhappy clients earlier because they got less allotment. Now there will be no reason to complain as the allotments will be proportionate,” he added.

The move to amend the IPO norms was triggered after many local institutions and mutual funds expressed their disappointment over niggardly share allotments they received in the recent big IPOs. They had recently written to the finance ministry and the market regulator protesting against the practice and demanding pro rata share allotments.

Mutual funds have clearly got a leg up from Sebi as they not only get a special quota out of the 50 per cent reserved for QIBs but can also now vie for more shares in the remaining 45 per cent reserved for other institutional investors. Only the MFs registered with Sebi will get this dual benefit.

The other important decision taken today was to direct institutional investors including mutual funds to pay 10 per cent of their bid amount as an upfront margin.

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