SEBI has proposed major changes to the rules governing the Indian Initial Public Offering (IPO) market. As part of these proposals, SEBI has suggested reducing the reserved portion for retail investors in large IPOs while increasing the allocation for Qualified Institutional Buyers (QIBs). The primary objective of these changes is to address issues such as undersubscription in large IPOs.
Let’s understand what SEBI has proposed for the IPO market and how these changes, if implemented, could impact retail investors.
What’s Happening?
On July 31, 2025, the Securities and Exchange Board of India (SEBI) proposed changes to the rules for IPOs exceeding Rs 5,000 crore. The aim is to enhance institutional investor participation while maintaining a minimum reserved portion for retail investors. This comes at a time when the average size of IPOs in the Indian stock market has been steadily rising. However, it has been observed that participation from retail investors and Non-Institutional Investors (NIIs) in large IPOs has often fallen short of expectations.
For instance, an IPO worth Rs 5,000 crore requires around 7–8 lakh retail applicants to be fully subscribed. For an IPO of Rs 10,000 crore, this number rises to approximately 17.5 lakh. In many cases, due to insufficient applications, the retail portion remains under-subscribed, which can lead to negative market sentiment around the IPO.
Meanwhile, Foreign Portfolio Investors (FPIs) are also facing allocation challenges in the anchor investor category. Since different FPI funds are treated as separate investors, the investor count limit is reached quickly, causing allocation hurdles.
To address these concerns, SEBI has proposed a series of changes.
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Key Proposed Changes
The most significant proposal in the consultation paper involves a revision in the allocation structure for large IPOs. This proposal will apply to IPOs exceeding Rs 5,000 crore. Under current rules, such IPOs must reserve at least 35% of the issue for retail investors, 15% for NIIs, and up to 50% for QIBs.
SEBI has now proposed that for IPOs above Rs 5,000 crore, the retail portion be gradually reduced from 35% to a minimum of 25%.
SEBI’s Current and Proposed Rules
Note: If the retail or NII quota is under-subscribed, it will be transferred to other investor categories. These rules will not apply to IPOs with an issue size below Rs 5,000 crore.
Proposed Rules for Anchor Investors
SEBI has also proposed easing allocation rules for anchor investors to encourage greater participation from large global funds. Under the current structure, for anchor allocations above Rs 250 crore, 10 additional investors are permitted for every additional Rs 250 crore. SEBI has proposed increasing this limit to 15 additional investors. With this change, for example, an IPO of Rs 10,000 crore with an anchor size of Rs 3,000 crore would see the maximum number of anchor investors rise from the current 125 to 180.
Additionally, SEBI has proposed a revised allocation structure within the anchor investor portion to include domestic mutual funds, life insurance companies (registered with IRDAI), and pension funds (registered with PFRDA). Currently, one-third (33%) of the anchor portion is reserved exclusively for mutual funds. SEBI proposes increasing this to 40%, where 33% will remain reserved for domestic mutual funds, and the additional 7% will be reserved for life insurance companies and pension funds. If the 7% reserved for insurance and pension funds is not fully subscribed, the remaining portion will be allocated to mutual funds.
What’s in it for Investors?
These proposals will have varying impacts across investor categories. For retail investors, the chances of receiving a direct allocation in large IPOs may reduce, given the proposed cut in their reserved quota. However, SEBI notes that retail investors are increasingly participating in the market through mutual funds. In June 2025, monthly SIP contributions reached a record Rs 27,269 crore. In line with this trend, SEBI has also proposed increasing the mutual fund reservation in the non-anchor portion of the QIB category from the current 5% to 15%. This would support retail investors’ indirect participation.
For example, in an Rs 8,000 crore IPO, the total effective retail participation (direct + mutual fund) under the current rules is Rs 3,680 crore (46%), which is expected to remain around Rs 3,475 crore (44%) under the proposed changes.
What’s Next?
It’s important to note that these are only proposals at this stage. SEBI has invited public feedback on them until August 21, 2025. The final rules will be framed after reviewing the suggestions received.
These proposed changes reflect the evolving nature of India’s capital markets, where IPO sizes are increasing, and investor behaviour is maturing. However, the actual impact will depend on how various market participants respond and adapt to the new structure.
*The article is for information purposes only. This is not investment advice.
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