Thanks for tuning in to the last video of our US versus India markets series. Earlier in this series, we covered the custodian and depository models as well as fractional shares. For today’s video, we will look at how IPO investing for retail investors is different across both markets.
As you might know, in India for every IPO there is a minimum allocation of 35% for retail investors. Additionally, there is a minimum 15% allocation to an investor type that is not retail and not institutional. So this covers the HNIs (High net worth individuals) and NRIs. This set allocation by the Sebi ensures that retail investors get to participate in IPOs in India.
But in contrast in the US, there is no set allocation for IPOs instead what happens in the u.s is that the IPO is controlled by what is called an underwriter and the companies that are going public.
Now, what are underwriters? These are companies that buy shares from the businesses that are IPOing and sell them to the investors. Now, these underwriters prefer to sell these shares to either institutional investors or ultra-high net worth investors. And why did they do that? Because they believe that this set of investors will hold the shares for a longer period of time. They will buy larger blocks of shares and also they are okay assuming the financial risks that come with IPO investing and now to add to it if an IPO is a hot IPO.
Like for example Airbnb where the demand far exceeds the supply, the chances that a retail investor gets access to the IPO becomes near zero.
So those were the 3 main areas in which the u.s markets differ from the India markets. Stay tuned for more.