Editorial | IPO allotment rule changes make market healthier as a whole
Retail investors not being able to buy hot stocks until after prices have settled following an IPO is not necessarily a bad thing
The initial public offering (IPO) game has never much favoured small retail investors. With red-hot IPOs, they usually only receive a small allotment, if at all. With less-popular IPOs, woe to those who manage to get all their subscribed lots as that pretty much signals a price fall at debut.
From August 4, IPO candidates have had to allocate at least 40 per cent of the shares to institutional investors, including family offices. That is up from no guaranteed allocation previously. The rules reduce the IPO shares that retail investors can get from the so-called clawback mechanism to 35 per cent, down from 50 per cent previously in the event of a heavily oversubscribed offer.
The IPO company may also not offer a clawback, in which case no more than 10 per cent is required to be allotted to retail investors. The new formula translates to a 50 per cent cap on IPOs for cornerstone investors, who face a six-month lock-up period.
Many retail investors offload their hot shares at debut to make a quick buck. Institutional investors tend to hold shares longer and help with price discovery, as well as stabilising prices, but it also means fewer retail investors can partake in a debut rally.