IPO Investment: Is SEBI Leaving The Retail Investors High And Dry?

At a time when the common Indian is warming up to the capital markets, market regulator SEBI seems inclined that they stay off the equity street. The regulator has been curtailing futures and options as well as day trading but an attempt to reduce retail participation in the primary market is likely to hurt the equity culture and financial inclusion push seen in recent years.

The latest SEBI proposal on retail participation in IPOs stems from a push by the institutional investors who are clamouring for more stocks and are finding it difficult to invest over Rs 26,000 crore of monthly SIP flows from the same retail category.

A gradual increase in equity investing class is the cornerstone of diversification of the financial markets. It prevents institutions, whether Foreign Portfolio Investments (FPIs) or domestic funds, from holding regulator or policymakers at ransom.

The influence of FPIs was broken effectively by the retail and domestic MF. However, the latest move to diminish the role of retail investors is in effect creating another monster which can only be countered by the direct retail investors.

The regulator is succumbing to the mutual fund lobby that wants to crowd out the retail direct investors — an investor category that is losing its voice fast and quick while SEBI watches on the sideline.

India's equity culture got a fill-up after Covid when work from home saw new and young investors investing in equity and equity derivatives market and actively participating in IPOs to invest and earn profits.

Active retail unique investors base rose from 3.5 crore in 2020 to 11.6 crore in July 2025, a jump not seen by or even capitalised by the mutual fund industry. The industry is still struggling at 5.5 crore unique investors. With such a huge gap between in the unique investor base, it would be unfair for the regulator to look at the reducing the retail participation in high value IPOs.

The recent Sebi discussion paper that reduces the retail investor allocation out of the large IPOs is seen as an attempt to alienate the retail investors away from the primary market. This is not the first time that the market regulator is trying to curtail the participation of the retail investors in IPOs. In the past the regulator has been vocal in its view that retail investors should buy from the secondary market rather than from the primary market.

Sebi may not be realising that there is a change in character of the new retail investor, they are young, risk-taking and financially savvy compared to investors in the pre-Covid era. And hence, they want their rights to participation protected in the IPO.

To be clear, gone are the days when retail investors used to invest up to Rs 2 lakh per IPO, the upper value limit prescribed by the regulator under the retail category. Today, with ASBA and a vibrant IPO market the majority of retail investors invest only for one lot of shares, as evident from the basis of allotment released by most IPOs.

The move comes as the regulator struggles to dissuade the retail investors from participating in the derivatives market. While the retail derivative turnover has declined in the market, the decline in participation is still far from what the regulator had anticipated.

The discussion paper now looks to reduce the retail allocation in IPOs above Rs 5000 crore. It proposes to allocate 10% of the incremental size above Rs 5000 crore in an IPO to retail investor,s subject to the retail allocation is capped at 25%. The decline in the retail category benefits the mutual funds who benefit from the gradual decline in the retail quota.

For first, SEBI has only considered IPOs with a profitable history, where allocation is up to 35%, but new age and fast-growing companies, many of whom do not have a three-year profitable record, have retail participation capped at 10%.

The key argument based on this discussion paper is that in large IPOs above Rs 5000 crore take 3.5-12 lakh retail applications to fill the retail portion of the IPO which could be 35% for a company with a profitable record company and 10% for a company without a profitable track record.

While the size of the IPOs in the last five years have risen exponentially with the smallest main board IPOs raising Rs 250 - 400 crore and average IPO size being Rs 3000 crore, this has been accompanied by the rise of the retail class which stood at 3.5 crore active investors in 2020 to over 11.6 crore active investors on the NSE now.

Crunching of the IPO timeline to T+3, introduction of ASBA has ensured there is fast turnaround of retail liquidity in the market. In the last 10 days alone over Rs 2 lakh crore of retail money was blocked in the bank accounts of retail investors, yet they continue to flock the IPOs and subscribe.

According to data sourced from Prime database, Rs 4.75 lakh crore was raised in IPOs since 2020 through 303 IPOs. These primary issues saw nearly Rs 9 lakh crore in demand from retail investors alone.

Sebi says as per the data from 280 IPOs since 2020, the average application size is approx. Rs 20,000. This would translate into a need for at least 7-8 lakh applications for an IPO of Rs 5000 crore and at least 17.50 lac applications for an IPO of Rs 10,000 crore for one time subscription.

But here is the counter,

In the last five years, average applications in an IPOs stood at 14.20 lakh while only 2.07 lakh applications were allotted shares and that too mostly one lot of shares. That is one retail application accepted for every seven retail application filed, according to data available.

To put in perspective, the Waaree Energies IPO saw over 70-lakh applications while Radiant Cash Management saw 13,857 applications. Moreover, there were just 50-issues in the last five years out of 303 IPOs where shares were allocated to all retail applications.

The fall in household savings post pandemic and subsequent migration of savings to equity and mutual funds points to increased interest of retail investors in risky assets. Savings in financial assets has risen to 5.3% of GDP and this is coming at the cost of bank deposits.

Direct retail ownership stood at 9.5% at the March quarter, which is at its highest level since 2007-08 with minor fluctuations on a quarter-to-quarter basis. This includes investment by domestic mutual funds, total retail investment direct and indirectly, stood at over 18% of the total equity ownership.

According to NSE, household wealth in Indian equities increased by over Rs 46 lakh crore in the past five fiscal years, with current holdings at Rs 74.5 lakh crore growing at a compounded annual growth rate of 16.9% during the last five-year period and at 35.7% over 15 years.

If retail is playing such a key role, then why reduce its exposure? IPO guidelines have enough regulations to manage the flow of supply of the retail category in the event of lower demand.