Revisiting IPO Allocation Reforms: SEBI’s 2025 Proposals

[Debangana is a student at West Bengal National University of Juridical Sciences.]

India’s public equity landscape is rapidly evolving, marked by a surge in mega-IPOs and an increasingly diverse investor base. The Securities and Exchange Board of India (SEBI), through its consultation paper dated 31 July 2025, has set out the proposed amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations), aimed at addressing structural frictions in the current IPO allocation framework. The proposals focus on three areas: anchor investor allotment, institutional reservations particularly for insurance and pension funds and adjustments to retail quotas in large public offerings. 

Anchor Investor Allotment and Structural Asymmetries

The current ICDR Regulations framework treats each foreign portfolio investment (FPI) fund, even if sharing a beneficial owner, as a separate anchor application due to the requirement for unique PAN identification. Meanwhile, all schemes under a mutual fund are counted as a single anchor application. This structural disparity restricts large FPIs, particularly global funds wishing to deploy large minimum-investment sizes across vehicles, often leading to the exhaustion of anchor lines.

Each successive year has seen an incremental rise in FPI activity and domestic institutional engagement, pushing the boundaries of a regulatory model originally designed for a smaller, less globalized market. Industry stakeholders have raised concerns that the restrictive treatment of anchor investors poses significant challenges to large FPIs operating multiple funds. Simultaneously, the growth of retail participation through mutual funds, especially via surging SIP inflows, has exacerbated these regulatory limitations.

The consultation paper identifies the inadequacy of the existing cap structure, which segments anchor allocation into outdated categories such as a below INR 10 crore-tier and applies incremental "lines" based on issue size. SEBI has therefore proposed consolidating these lower tiers and, crucially, permitting a minimum of 5 and a maximum of 15 anchor investors for allocations up to INR 250 crore. For every additional INR 250 crore above this threshold, the number of permissible anchor investors would increase from 10 to 15.

The proposed changes to Schedule XIII of ICDR Regulations are designed to accommodate large funds, both global and domestic that require extensive, diversified anchor positions. The merger of obsolete categories and the increase in anchor lines reflect the market reality that Indian IPOs routinely exceed INR 5,000 crore.

The proposal rightly underscores the need to robustly enforce aggregation of beneficial ownership. Without such safeguards, there remains a risk of regulatory circumvention through artificial splitting of applications which can undermine the objective of equitable and transparent allocation.

Comparatively, global practices offer a more flexible regulatory landscape. For instance, US Securities and Exchange Commission's regulations require transparent disclosure of beneficial ownership for any entity (aggregating across funds/accounts) exceeding certain thresholds (e.g., 5% of a company’s shares), but IPO allocations themselves are typically managed at the fund/account level, not forcibly aggregated unless they’re acting in concert under Rule 13D/G. Multiple funds from the same manager can participate separately, as long as their overall beneficial ownership reporting obligations are met. This comparison highlights that there is significant flexibility, unlike India’s PAN-based restrictions for FPIs. 

Reservations for Insurance Companies and Pension Funds

SEBI has historically reserved one-third of the anchor allocation for domestic mutual funds, with no provision for other long-term institutional investors. Yet insurance companies and pension funds have steadily increased their presence, contributing between 3–11% of anchor books in recent large IPOs.

The proposed framework expands this approach by reserving 33% of the anchor book for mutual funds and an additional 7% for IRDAI-registered insurance companies and PFRDA-registered pension funds, establishing a combined 40% cap. Notably, mutual funds and insurance/pension funds may absorb unallocated shares in case of undersubscription in either slot. These amendments would be enacted through changes to clause 10(d) of Schedule XIII.

This measure represents an intentional regulatory approach designed to strengthen the structural foundation of India’s long-term institutional capital. Institutional investors, including insurance companies and pension funds, known for their prudent investment practices and extended investment durations play a critical role in ensuring market stability by predominantly retaining their holdings over sustained periods, as opposed to engaging in frequent transactions. The incorporation of these entities is substantiated by empirical research evidencing their stabilizing influence on post-listing price behavior and enhancing the price discovery mechanism. 

Flexibility in the Retail Allocation for Large IPOs

The most commercially significant proposal involves revising the retail quota structure for large IPOs. Regulation 32 of the ICDR Regulations currently mandates that not less than 35% of each IPO be reserved for retail individual investors. This static rule has proven increasingly misaligned with mega-issuances above INR 5,000 crore.

SEBI now proposes that for offers exceeding INR 5,000 crore, 35% of the first 5,000 crore be reserved for retail, while only 10% of the incremental portion beyond that would be allocated to retail. However, a minimum floor of 25% of the total net offer would be preserved.

In tandem, the QIB quota would increase from 50% to up to 60%, and the reserved proportion for mutual funds in the non-anchor QIB segment would triple from 5% to 15%, reinforcing indirect retail participation through mutual fund channels.

Analytical Perspective and Comparative Jurisdictional Insights on Reducing Mandatory Retail Quotas in IPOs

These changes respond directly to a structural challenge: as IPO sizes grow, the number of retail applications required to meet the 35% quota becomes statistically implausible. In several recent high-profile issuances, retail categories have failed to achieve even one-time subscription, resulting in adverse market perception. A notable example of this misalignment is the INR 18,300 crore Paytm IPO in 2021. Despite strong institutional backing, the issue struggled with retail and non-institutional investor undersubscription, leading to steep fall in post-listing prices and public dissatisfaction.  The upcoming NSE IPO has already raised concerns in market circles regarding the retail investor base’s capacity to absorb such scale.

As a result, SEBI’s increased focus on qualified institutional buyers (QIBs) reflects the recognition that these sophisticated institutional players possess access to non-public information. Their participation not only boosts subscription levels but also offers an initial market signal regarding the quality of the issue. Anchor participation further enhances IPO liquidity, with a clear correlation between anchor investments and reduced market volatility. An increased quota for QIBs is therefore expected to instill confidence among retail investors in the overall demand for shares, while also strengthening trust in the IPO process itself.

By recalibrating the allocation structure based on deal size and actual participation trends, SEBI pre-empts the reputational risks associated with chronic undersubscription. Notably, the significant increase in IPO allocation for mutual fund houses from 5% to 15% in the non-anchor QIB segment and directly acknowledges their evolving role as the principal channel of household investment in the stock market.

At the same time, it is pertinent to acknowledge that as large, high-profile IPOs become more international and institutionally focused, there remains a perceptional risk of crowding out retail investors who traditionally form the backbone of India's capital markets. To manage this transition, broad-based investor education and continued support for indirect retail participation through mutual funds will be essential.

Globally, mandatory retail quotas are rare. In the US, allocations are governed primarily by the issuer–bookrunner dynamic and typically skewed in favor of institutions. Interestingly, Hong Kong, by contrast, adopts a “claw-back” mechanism under Practice Note 18 (PN18), of the HKEX Listing Rules, wherein a minimum of 5% of IPO shares is initially allocated to the public subscription tranche which can further be scaled to 15%, 25%, or 35% depending on whether demand is 15–49x, 50–99x, or 100x and above, respectively. Further, issuers can also opt for a fixed 10% retail allocation without a claw-back mechanism. This framework ensures greater retail participation in oversubscribed issues while retaining flexibility to transfer shares back to the institutional tranche if retail demand is insufficient thus it is an approach that avoids rigid minimum quotas of the kind currently imposed in India.

Conclusion

SEBI’s 2025 proposals represent a significant evolution, combining empirical data, comparative insight, and statutory modernization. If adopted, these changes would foster a deeper, more diversified pool of anchor investors, strengthen the role of long-term institutions, and produce a more realistic structure for public allocation in large IPOs. The legal rationale behind the proposed amendments is clear: regulation must evolve to reflect the scale of current market activity and the practicalities of capital raising today. However, it is crucial that institutional reservations must be fine-tuned to ensure continued competitiveness and flexibility in the retail quota must be managed to protect investor confidence and market integrity. However, successful implementation will depend upon SEBI’s ability to execute these changes while mitigating the transitional uncertainties as mentioned above.