The Securities and Exchange Board of India is planning to change the basis of share allotments for qualified institutional buyers, from the discretionary basis to the proportionate allotment basis.

The Sebi move comes after QIBs complained to the market regulator that the discretionary system provides too much leeway to the whims and fancies of the issuer and its merchant bankers.

The proportionate allotment system is currently applicable to retail investors and high net worth individuals.

At present allotment to QIBs is at the complete discretion of the issuer (seller) and its lead managers, based on several criteria that are entirely subjective in nature. The upshot is that QIBs do not always get the kind of allotment that they want and sometimes get no allotment at all.

One effect of reverting to a proportionate allotment system for this category of bulk investors is that subscriptions levels will shoot up significantly as these investors put in more bids to increase the number of shares finally allotted to them.

Merchant banking sources said that the proportional allotment system would also lead to better price discovery since QIBs are now assured of at least some allotment.

In a proportionate allotment system, the issuer and its merchant bankers sit with the book-builder -- where all details of bids received in that category are noted -- and, depending on the oversubscription, allot shares to each valid bidder (at or above the cut-off price) in proportion to the oversubscription.

Thus, if the retail book is subscribed two times, each investor will get half the number of shares bid for. So also, if the book is subscribed four times, each one gets one-fourth the amount bid.

But in the current discretionary system for QIBs, the issuer and its merchant bankers have complete discretion in deciding the allotment process, though numbers like the number of shares bid and bid price have an unknown weightage too.

The rest is all open to interpretation. Issues like "the quality of the investor" could mean whether the bidder is a global emerging markets fund or a speciality fund and its track record of investments in the country.

Merchant banking sources said every company wanted to have long term investors that will remain committed to the company and bring their global insights to the working of the company.

Then there is an "early bird" clause that says that investors who put in early bids will get some preference, though this is not quantified. Merchant bankers rationalised this, saying that investors show their commitment to the company by standing by in the IPO process itself.

A new system

• The move comes after QIBs complained to Sebi that the discretionary system provides too much leeway to the whims and fancies of the issuer and its merchant bankers.
• The proportionate allotment system is currently
• applicable to retail investors and high net worth individuals.
• The proportional allotment system will increase subscription levels significantly and will also lead to better price discovery.