Differential pricing

In most public issues every allottee pays the same price. SEBI allows one important exception.

An issuer may give retail investors a discount. The discount is measured against the price at which shares are allotted to the other investor categories, and it is capped: not more than 10 percent.

The point is to widen retail participation. In a book-built issue, the price is discovered largely through the bidding of institutions; differential pricing lets the issuer share part of that price with small investors, without undercutting the price institutions actually pay.

The workbook states it twice, in two chapters.

Chapter 7.3 (Reservations). A public issue through book building can carry reservations for categories such as employees, specified shareholders or retail individual investors, and offers may be made at different prices subject to the norms on differential pricing. The issuer may have differential pricing for retail investors at a discount not exceeding 10 percent of the price at which shares are allotted to other categories.

Chapter 9.8 (Book Built Issue). Book built issues may carry a clause allowing allotment to retail investors at a discount to the cut-off price, which cannot exceed 10 percent of the price at which shares are allotted to the other categories.

The surrounding book-building rules.

Maximum retail discount = 10% × Price allotted to other categories
Minimum retail price    = 90% × Price allotted to other categories

Take the workbook's book-building illustration: a price band of Rs 120 to Rs 144, filled at a cut-off of Rs 135.

First, the band itself is valid:

Cap ÷ Floor = 144 ÷ 120 = 1.20 → exactly 20% above floor ✔

Now suppose (illustratively) the RHP provides a retail discount.

Maximum discount = 10% × Rs 135 = Rs 13.50
Lowest retail price = 135 − 13.50 = Rs 121.50

With a Rs 10 discount, a retail investor allotted 110 shares pays 110 × Rs 125 = Rs 13,750; an NII allotted the same 110 shares pays 110 × Rs 135 = Rs 14,850. The difference of Rs 1,100 is the retail discount at work.

Chapter 7.3 (Reservations) and Chapter 9.8 (Book Built Issue). The single examinable number is 10 percent, and the favourite trap is its base — the price paid by other categories, not the floor price or the upper end of the band.

• The discount is capped at 10 percent, measured against the price at which shares are allotted to other categories.
• It is not measured against the floor price or the cap of the price band.
• The price band cap is a different 20 percent — the cap over the floor. Two percentages, two rules.
• Differential pricing is permitted, not required. It must be provided for in the issue terms.
• The workbook's QIP discount is a different rule — not more than 5 percent on the formula price, with shareholder approval.
• Retail individual investors bid up to Rs 2 lakh and are the only category allowed to bid at cut-off.