The market regulator has tweaked share allotment rules for initial public offerings (IPOs) to remove a strong suspicion of bias in the way shares were being handed out to cherry-picked institutional investors (called QIBs ? qualified institutional bidders ? in market parlance).

The upshot is that retail investors now theoretically get a greater chance to ride into the equity markets through mutual funds, which will now get an additional 5 per cent of the allotment out of the share that was reserved for QIBs.

Moreover, QIBs (comprising foreign institutional investors, domestic financial institutions such as banks, insurance companies, mutual funds and the like) will now have to stump up 10 per cent of the money upfront while applying for the shares.

Market watchers say the new IPO rules address the issue of superficial demand creation and bring in the much-needed discipline that is required for the healthy growth of the market.

What?s in store

So, in a country where less than 2 per cent of household savings is invested in the stock markets, what do the changes in the share allotment rules really mean for the common man?

?The retail investor will be relieved from the sense of discomfort at being discriminated. Whereas a retail investor was allotted shares on an anonymous basis, the QIBs were getting preferential treatment which cast an obvious shadow on the authenticity of such allotment,? says Prithvi Haldea, managing director of Prime Database.

Agrees Dhirendra Kumar, chief executive officer of Value Research, ?Investors are investors and there are no high or low quality investors. Each has an individual outlook and investment strategy and any attempt to identify quality investors is a futile exercise.?

?The hype built around the huge oversubscription within minutes of opening of the issue will also be taken care of. The upfront margin system will play an important role as it will only bring serious bidders to the issue because a bidder who is putting margin money is also taking a call on allotment,? explains Haldea.

Price discovery

Many argue that since the institutional bidders will now come in at the last moment to save on opportunity cost for funds, there will be no direction for price discovery for other investors.

Argues Kumar, ?Speculative bidding of such institutions always skewed the response pattern to the offer and also influenced the pricing decision. When the number of shares bid for at the upper end of the price band exceeded those on offer, the temptation was to price the IPO at that level. And we have seen that in almost all IPOs, the applications have been made at the highest price.?

However, some sceptics say that it is doubtful whether a 10 per cent margin will be enough to curb speculative bidding by the QIBs. In addition, the market regulator may have to soon focus on yet another aspect of the IPO process ? funding by banks and other institutions.

Right step

Nevertheless, the 5 per cent reservation for mutual funds is termed as a long-awaited move.

?The reservation for the mutual funds will ultimately translate into value for retail investors who take the mutual fund route to investing in stocks,? said Kumar.

?More retail investors might now prefer to invest in mutual funds rather than undergo the process of IPO application with its problems of refund, lost application and nil allotment,? adds Haldea.

Mutual fund managers are not terribly enthusiastic about the new norms. Many do not expect to see retail investors beating a path to their doors with a sack full of cash to invest in the units of mutual funds. However, they agree that the 5 per cent extra reservation will help them.

?Though we do not see a huge advantage, the 5 per cent reservation should surely help the mutual funds and thereby indirectly the retail investors,? says Nilesh Shah, chief investment officer, Prudential ICICI Mutual Fund.

?We think that 5 per cent is too low, it should be at least 10 per cent. However, it seems a good beginning,? said A. K. Sridhar, executive director and chief investment officer of UTI Mutual Fund.

More the merrier

The market regulator took another decision requiring promoters of Indian listed companies to increase the public holding to 25 per cent within the next two years.

There is still some quibble over whether this applies to everyone ? telecom, media and technology companies are exempt ? and others are also looking to seek a waiver from the requirement.

It will definitely prevent unscrupulous promoters from controlling high stakes in the companies, which often results in price rigging, thereby hurting the common investor. And above all, it will improve the depth and liquidity in the market, mentioned market sources.

Will the market witness a number of public offers in the coming two years, the time limit given by Sebi to ensure the free float?

Says Haldea, ?Of course, there will be a surge in the market offerings. However, the companies may choose various ways of doing so, including private placement, rights issue and others.?

However, he allayed fears of a delisting rush because of this directive.

?The decision taken by companies to list or delist is not driven by the market rules and is governed by their overall business strategy.?