Mumbai: Capital market regulator Securities and Exchange Board of India (Sebi) may double the investment limit for retail investors in public issues.

In a discussion paper put up on Wednesday, Sebi proposed to allow retail individual bidders to bid up to Rs2 lakh in every public float, from the current limit of Rs1 lakh. It has invited comments from the public on this proposal till 3 September.

Investment bankers said the trigger for the move could be the proposed initial public offering (IPO) planned by state-owned miner Coal India Ltd (CIL). According to some estimates, the float could raise up to Rs17,700 crore.

If this is the target, around Rs6,195 crore of CIL shares will be available for subscription by the public as 35% of any such issue is reserved for retail individual bidders. This will also require a minimum of 620,000 applications, assuming that each investor applies for the maximum amount.

The follow-on public offers (FPOs) of NTPC Ltd, which raised Rs8,478 crore, and NMDC Ltd, which raised Rs9,970 crore, saw less than 20% of the retail portion being subscribed.

However, SJVN Ltd, which raised Rs1,079 crore through an IPO in May, saw a retail subscription of over three times.

The Sebi paper has termed garnering retail subscription a “daunting task". “For an issue size of Rs4,000 crore to Rs6,000 crore, the limit of Rs100,000 would mean that the issue has to receive a minimum of 150,000 to 200,000 applications from retail individual investors to fill in the 35% allocation. This could be a daunting task considering that in case of well oversubscribed issues, the number of applications received from retail individual investors was in the range of 35,000 to 70,000," it said.

“It is a practical problem for bankers," said Tapasije Mishra, managing director of IDFC Capital Ltd. “In the recent FPO of Engineers India Ltd, we received about 1.7 lakh applications. The average number of retail applicants in the past few public issues is around one lakh. Even if all these applicants apply their full quota, that would not be enough for a big issue like Coal India," he said, adding that the Sebi “move will address that issue". In addition to this, the capacity of individual investors to invest in public floats seem to have risen over the past five years.

Sebi observed that in recent public offerings, approximately 75% of applications by retail investors were for Rs80,000-100,000. This suggests that the limit was a constraint for them.

Prithvi Haldea, chairman and managing director of Prime Database Ltd, a Delhi-based primary market tracker, found the Sebi move “flawed".

“The logic is bogus. The move is in favour of rich investors and will crowd out the pie available to small investors. This will hamper new investors coming to markets, who typically come through the IPO route," he said.

According to Haldea, 75% of the retail investors in 2007, when the IPO markets peaked, invested around Rs50,000or even less in each public float. “The ideal way to increase retail participation would have been to increase the retail portion from 35% to 50%," he said.

MFs’ exposure capped

Sebi on Wednesday reviewed investment and disclosure norms for mutual funds (MFs) in the derivatives market. The regulator has capped the option premium paid to 20% of the net assets in a particular scheme.

It also issued new guidelines for mutual funds’ entry into plain vanilla interest-rate swaps for hedging purposes.

So far, there has been no restriction on exposure to option premiums and mutual funds could pay as much premium as they wanted for buying options for certain schemes.

“The restriction on exposure may hurt some high-risk, high-return schemes. There should be more flexibility rather than a uniform norm for all schemes," said the chief investment officer at a large domestic fund house, who did not want to be named.

According to him, the guidelines on interest-rate swaps will help fund houses hedge bets taken by fixed-income and bond funds.

Sebi said exposure to a single counterparty in such transactions can’t exceed 10% of the net assets of the scheme.

“Funds will be able to hedge their risk on interest-rate exposure more effectively, but Sebi should not have restricted the single-party exposure at 10%," the domestic fund house executive said.

The regulator has also asked mutual funds to disclose their exposures in derivatives on a half-yearly?basis.