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Initial Public Offering (IPO) Modernization – Benefits for small investors

This article talks about the discussions currently happening on the Initial Public Offering (IPO) modernization front. It discusses the proposal to do away with 100% upfront payment by retail investors, and also presents a detailed analysis in the context of the Reliance Power IPO.



Two proposals revolving around IPO modernization are making the rounds at the Securities and Exchange Board of India (SEBI):

  1. Reduce time to market
  2. Only block money for IPOs, not actually pay it

Let’s discuss each in detail.

Reduce Time to Market

Here, SEBI is proposing to shorten the time taken by the entire IPO process, especially the time between the closure of the issue, allotment and listing.

This is definitely beneficial to the retail investors: This means that the precious little money that they have would not get locked in for an extended period.

As such, there is a difference between Qualified Institutional Bidders (QIBs) and retail investors – in an IPO, QIBs need to pay only 10% of the total amount at the time of application, whereas the retail investors need to pay the full 100%!

If the window between the closure of an issue, allotment and its listing is reduced, it would quickly put money back in the pockets of small investors.

But it is the second proposal that is more exciting….


Block Money for IPOs, Not Actually Pay It

This proposal questions the practice of paying upfront for shares that you are not even sure of being allotted! And isn’t this very sound logic?

These days, the over-subscription in IPOs is huge, and you end up getting allotment of only a fraction of the shares you applied for. So, why should you pay full money, for all the shares, at the time of applying in an IPO? Can’t there be a better procedure?

There can be, and that is exactly what is being discussed by SEBI.

The logic behind paying the full sum is that the stock issuing company needs to be certain about your commitment, and it should get the money on time once the shares are allotted to you.

But the same thing can be achieved in another way – by earmarking or blocking the money in your account for the IPO. Yes, money in your account – and it stays in your account during the entire IPO process, and gets deducted only when you are allotted the shares!

This way, you are happy because the money remains in your account and earns for you, and it is made available to you as soon as the allotment is over – the block is removed for the amount equivalent to the shares you did not receive, and you can invest it again instantaneously!

How much money are we talking about here? Let’s take the example of the mega IPO (Initial Public Offering) of Reliance Power.


The IPO was open from January 15 to January 18, 2008. It had 22.8 crore shares on offer, with 30% reserved for retail investors. Thus, 6.84 crore shares were available for retail investors.

The price band was Rs. 405 to Rs. 450. There was a discount of Rs. 20 for retail investors. Also, there was an option that retail investors could pay only Rs. 115 at the time of application, and pay the remaining at the time of allotment.

The allotment of shares happened on January 31, 2008.

Let’s assume, to be very conservative, that ALL retail investors paid only Rs. 115 per share at the time of application. Also, let’s assume that all retail investors applied only on January 18th, the last day of the IPO.

The retail portion of the IPO was oversubscribed by 15 times. Thus, application was received for 102.6 crore shares. At Rs. 115 per share, this means that Rs. 11,799 crores was collected just from retail investors! (Now, this is the most conservative estimate. There are lots of media reports suggesting that the collection from retail investors was 2 -3 times this amount!)

Now, let’s do the math.


Issue Close Date: January 18th
Allotment Date: January 31st

Thus, number of days for which money was held by Reliance Power: 14 days

Even if the banks invested this money (in some way or the other, on behalf of Reliance Power!) at a meager 5% per annum, how much money they would make?

11799 Crores * 0.05 * (14/365) = 22.63 Crores

22.63 Crores!! Now, that’s a LOT of money. And this, when we have been the most conservative in our calculations!!

And remember, it is going out of our pockets – the small investors’ pocket. This is the money that we could have collective earned, and could have invested back in one way or the other.

Instead, it goes to the companies and their banks.

Isn’t it high time we stopped this? Your comments, as always, are most welcome…

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