Did You Know ? | Soon you will be able to bid for an initial public offer at a discounted price

Did You Know ? | Soon you will be able to bid for an initial public offer at a discounted price

In a move that is set to give a further boost to retail participation in initial public offers (IPOs), the Securities and Exchange Board of India (Sebi) has asked companies to provide discounts, if any, to retail investors at the time of filing applications rather than at the time of allotment. The rules laid down in the new circular, issued on 16 May 2011, will be applicable on all companies applying for IPOs on or after 15 June 2011.

Moreover, the new Sebi norms mandate that the discount should be announced at the time of applying. It has said that the quantum of discount should be mentioned in the offer document and the application form—in terms of percentage as well as absolute rupee figure for the ease of investors. As of now, the discounts are announced only after Sebi approves the draft prospectus.

What happens at present

In November 2007, Sebi allowed differential pricing of public issues. In other words, companies were given the freedom to offer as high as 10% discounts to retail investors on the price offered to other categories of investors, such as foreign institutional investor and high networth investors. Investments up to 2 lakh come under the retail category.

However, these discounts can be availed not during the bidding process but only after the allotment of shares was completed. So even the retail investor has to place his bid at the price offered to all categories of investors and the discount is refunded after the shares were allotted to him finally. Here’s how it works: assume an IPO’s issue price is 11 for all categories of investors, but 10 for you, the retail investor, at a 10% discount. You bid for 10 shares at 11 and shell out 110. Assume you are allotted all 10 shares, your cost will be 100 ( 10 x 10 shares) and the remaining 10 will be refunded to your account.

What will happen in future

The latest move ensures that you bid at the discounted price set for the retail investor. In the above example, you will bid for each share at 10 in the first place and not at 11. This means your 110 will be able to buy 11 shares and not just 10. In other words, you will be able to apply for more number of shares with the same amount of money.