Behavioural biases that damage your investments!

Activities in the primary market are buzzing like never before. The first half of 2021 saw two dozen companies listing on the exchanges after raising Rs 38,961 crore through the initial public offers (IPOs) route. This compared to 16 companies raising Rs 31,128 crore through IPOs in whole of the calendar year 2020. In fact, half a dozen IPOs in H1FY21 were subscribed over 100 times.

Despite the heightened activity in the primary markets, retail or individual investors are often left high and dry as they barely get allotments in an IPO. Apart from money, luck is a prerequisite for an investor to get shares allotted in IPOs. According to SEBI guidelines, if an IPO is oversubscribed in the retail category, the shares are to be allotted in a manner that ensures that every retail bidder gets at least one minimum lot. The remaining shares, if any, are then allotted on a pro-rata basis.

However, in the event of the IPO being oversubscribed to an extent, where the minimum allotment to each retail bidder is not possible, the applications are picked on the basis of lottery and shares are allotted to them.

This is unfair for retail investors even after they have occupied the centre stage in stock markets. According to data released by NSE individual investors now form 45% of the trading turnover on the stock exchange. It is high time that the market regulator Sebi rethinks the IPO allotment guidelines and devises a process to ensure that maximum number of individual investors get some allotment in an IPO. Sebi can take cues from Indian Railways which is reconfiguring coaches so that more passengers get confirmed berths. One way is to do away with the lot allotment system and allot on the basis of the number of shares available for retail investors. This will ensure at least some shares are allotted to every retail investor. Or, if the number of retail applications is huge, fractional allotment of shares can also be considered.