A retail investor is an individual investor in the Indian Securities market whose subscription to securities is of a value less than Rs. 2 lakh (US $ 3130).
It does not matter how much is that individual’s existing shareholding in the market or what his present networth is. The only condition is that at the time of subscription or bidding for shares or securities he/she should not be bidding for more than Rs. 2 lakh worth of securities.
This term “retail investor” is defined in Section 2(zf) of the SEBI (Issue of Captial & Disclosure Requirements) Regulation, 2009.
The category of retail investors has been identified to target tax incentives, concessions and price discounts to them.
- For instance, in public issues retail investors are given “reservations on competitive basis” i.e. they are allotted securities in the reserved quota, in proportion to the number of securities they applied for to the total number of such reserved securities.
- At least 35% of the net offer to the public should be allotted to retail individual investors, in case the company is making the public issue through voluntary book building process. In case of compulsory Book-Built Issues it is 10%. If the public issue is not through book building route (i.e., if the securities are issued at a fixed price) then minimum 50% has to be offered to retail investors.
- Only the retail investors have the option of bidding at 'cut -off'.; i.e., they can tick the cut-off option which indicates their willingness to subscribe to shares at any price discovered within the price band. Even if price indicated by applicant is lower than the price discovered, the cut-off bids always remain valid for the purpose of allotment, unlike price bids (where a specific price is indicated).
- Retail investors can be offered upto 10% discount to the price at which securities are allotted to other investors.
- In case of stake sale of already listed companies through Offer for sale route, minimum 10% of the issue is reserved for retail investors and latter can also be given price discounts and permission to bid at cut-off prices.
- The retail individual investors may either withdraw or revise their submitted bids.
- They are eligible for “safety net arrangements” provided by the issuer wherein the issuer of securities offers to purchase back securities from the original resident retail individual allottees at the issue price, in case the post issue price of that security falls below some threshold levels within a specified period of time (say six months).
While introducing the tax incentive named “Rajiv Gandhi Equity Savings Scheme” a new section 80CCG on ‘Deduction in respect of investment under an equity savings scheme’ was added in the Income tax Act, 1961 (vide Finance Act, 2012 and amended vide Finance Act, 2013), to give tax benefits to ‘New Retail Investors’. As per the provisions of this scheme, retail investors are those with gross annual income less than or equal to Rs.12 Lakhs, and invest up to Rs.50,000 in a single financial year, for three consecutive assessment years. Thus, for the purposes of availing these tax benefits, retail investors are defined in terms of both investment limit and annual income level.
Earlier Definitions of Retail Investors
Retail Individual Investor in a public issue was defined, until August 2003, in the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP Guidelines) as given below:
(i) Fixed price issue: Retail Individual Investor is one who applies for allotment equal to or less than 10 marketable lots.
(ii) Book built issue: Retail Individual Investor is one who applies for up to 1000 securities.
This definition of Retail Individual Investor did not differentiate between investment capacities of different investors. e.g. a Retail Individual Investor who applies for 1000 shares of Rs.500/- each and a Retail Individual Investor who applies for 1000 shares of Rs.10/- each. Hence, it was decided to define Retail Individual Investor on the basis of amount applied for, instead of the number of shares applied for and DIP Guidelines were amended in August 2003 to provide that a Retail Individual Investor means an investor who applies or bids for securities of or for a value of not more than Rs.50,000.
Later this limit of Rs. 50,000 was found to be too low particularly in the context of large size book built issues and also resulted in higher transaction costs. In view of this, in March 2005, the DIP Guidelines were amended to enhance the aforesaid limit from Rs. 50,000 to Rs.1,00,000. This stipulation of DIP Guidelines got incorporated in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) when latter replaced the DIP Guidelines.
With effect from 12.11.2010 SEBI doubled the limit for maximum application for retail individual investors from Rs 1 lakh to Rs 2 lakhs across all public issues, after accounting for inflation and other changed circumstances.
Under ICDR, uptill 2010, a “retail individual shareholder” also used to mean
(i) a shareholder who, as on the date fixed for the purpose of determining shareholders eligible for reservation in terms of the ICDR regulations, is holding equity shares worth up to one lakh rupees and
(ii) applies or bids for specified securities for a value of not more than one lakh rupees;
The condition at (i) above was deleted in 2010.
- SEBI (Issue of Capital & Disclosure Requirements) Regulation, 2009
- Discussion paper of SEBI issued in 2009 while proposing to raise the existing limit from Rs 1 lakh to Rs. 2 lakh