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Retail Investors and their Role in an IPO

Retail Investors and their Role in an IPO

Retail investors in the case of an IPO are defined as small investors who invest up to Rs. 2 lakh in any IPO. They have a dedicated 35% allocation in any book built issue. Those individuals who invest more than Rs.2 lakhs in an IPO are classified as non-institutional investors or HNI investors.

How can Retail Investors Apply in IPOs

As a retail investor you can apply either through the online mode or the offline mode. You need to have a demat account before you can apply for an IPO. In the IPO form you have to select that you are applying in the retail quota. The IPO form defines the number of maximum shares that will qualify for the retail category. The retail investment limit is set in terms of shares that are just below Rs.2 lakh in value. A retail investor can bid for any number of shares between the minimum bid size and the maximum limit for the retail investor.

Why are Retail Investors Important to the IPO

Wider variety
Retail investors are more heterogeneous by nature and they don’t act in bulk. For example, institutions like hedge funds, index funds, ETFs etc are driven by broad rules. So the decision to sell is normally a joint decision. In case of retail investors there is no such worry as they typically do not behave in a homogenous manner like institutions.

Lend stability to the issue
As a logical result, retail investors tend to lend more stability to the stock price as compared to the institutions and HNIs. For example, HNIs are driven by their funding costs and if the fund cost is not justified they may sell en masse. That kind of problem does not exist when it comes to small and retail investors.

Ownership spread
Retail investors are the key to spreading out ownership of a company. Typically, company managements will prefer that their ownership is as spread out as possible. Most promoters are not comfortable with a few institutions owning chunk of their shares as the price becomes too dependent on the actions of these institutions. That is where retail is the key.

Maximum reach
When a company is normally into manufacturing of products that seek a retail market, then it becomes important to send out the right message to a much larger audience. Most of your shareholders who own shares in the company also are potential customers as the trust in the company already exists when they have seen wealth being created.

Retail story of RIL
Companies like Reliance Industries built their capital markets presence purely on the strength of the investment interest shown by small and retail investors. When you have a large mass of retail investors you are help a large pool of people to build and create wealth over the long term which is ultimately instrumental in helping them towards their long term goals.
Retail investors are the key to creating a proper perception of the company and it is useful in reaching out to the right audience. Also having retail investors creates a more diverse retail base of shareholders which is useful in the long run for companies.



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