SEBI asks all investors to pay 100% margin upfront for public issues  

March 6, 2010

Market regulator Securities and Exchange Board of India (SEBI) has mandated all types of investors to bring in 100% of the application money as margin along with the application for securities in public issues. This would avoid inflated demand in public issues and provide level playing field to all investors subscribing for securities, SEBI said.

 “Qualified institutional buyers (QIBs) will have to make 100% payment in line with what other investors are required to do on all issues that open on or after 1st May,”  SEBI chairman CB Bhave said after a Board meeting.

Separately the Finance Minister (FM) Pranab Mukherjee also held a meeting with SEBI Board members. While refusing to divulge more details about the meeting, Mr Bhave said,” The meeting with the FM focussed largely on issues like investor protection and investor education and the FM is the right person to give more details regarding the meeting.”

In an unrelated matter, the SEBI board has also decided (in principle) to allow the stock exchanges to introduce physical delivery in equity derivatives. Mr Bhave said the regulator is in discussions with the stock exchanges and hope to start the physical delivery as soon as possible. At only physical delivery in cash settlement is allowed.

The market regulator also allowed (in principle) stock exchanges to introduce equity derivatives contracts with a tenures of up to 5 years from the current 3 years. The SEBI chairman said, subject to proper risk mechanisms in place, the exchanges can also introduce derivative contracts on volatility indexes which have suitable track record.

The SEBI Board also decided that the reservation for employees in public or rights issues would be available to employees of subsidiaries and material associates of the issuer whose financial statements are consolidated with the issuer’s financial statements.

SEBI’s decision regarding 100% application money would largely affect large investors like QIBs who until now used to pay just 10% of the value of shares they subscribe during the public offerings including initial public offering (IPO) or follow-on public offering (FPO). This has now been raised to 100% of the share value, to bring in parity with the other investors. It would also help avoid inflated demand during public issues, as QIBs used to take advantage of the low margin requirement and subscribe heavily into the public issues.

Mr Bhave also indicated that the regulator is working on reducing the time gap between the closing of an IPO and its listing on the stock exchanges to one week from the current waiting time of 20 days. — Yogesh Sapkale & Sanket Dhanorkar