In an interesting policy turnaround, the Securities and Exchange Board of India (SEBI) has pulled back its provocative plan to cut retail investor allotment in big IPOs, a proposed change in the regulator’s strategy towards market democratization and investor protection.
The Original Proposal and Market Reaction
SEBI had, on July 31, 2025, mooted a foundational overhaul of IPO allocation structures for the larger offerings over ₹5,000 crore. The initial consultation paper had proposed lowering the quota of retail investors from the current 35% to 25% in a phase-wise manner, while the qualified institutional buyer (QIB) quota was to be enhanced from 50% to 60%. This proposal was rationalized on the basis of citing difficulties encountered by giant issuers in dealing with huge public offerings and comparatively subdued retail subscription levels in mega IPOs.
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The intentions of the regulator were based on market absorption capacity, that though average IPO sizes have continued to grow over recent years, retail participation directly has been flat over the last three years. SEBI noticed large public issues presented special challenges, since retail subscription numbers had been strikingly muted in issues of large size.
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The Strategic Reversal
However, in a consultation paper released on August 18, 2025, SEBI executed a complete U-turn on this contentious proposal. The regulator announced that the retail quota in IPO allocations would be retained at 35%, in line with existing Regulation 32 of SEBI (ICDR) Regulations, 2018. This reversal came after the regulator noted it had been “constantly monitoring stakeholder feedback” on the matter.
Market Stakeholder Pushback
The policy change was mainly due to firm opposition by investors and market players who opposed curtailment of retail participation in the capital markets. Market players believed that SEBI should not only look at retail subscription figures in big issues but also assess price as an important factor influencing retail participation.
Opponents of the initial plan claimed that limiting retail allocation would erode the democratic character of capital markets and restrict access by individual investors to potentially profitable investment opportunities. The consultation emphasized the issue of ensuring fair retail access while ensuring the market is inclusive.
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Alternative Approach: Relieving Dilution Needs
Rather than cutting retail participation, SEBI sought another solution to tackle issuer apprehensions regarding big IPOs. The regulator suggested diluting minimum public offer rules for extremely large firms and broadening timelines for achieving minimum public shareholding (MPS) norms.
Under the new paradigm, those companies with post-issue market capitalizations above specified levels would have lower dilution requirements. For example, companies worth over ₹5 lakh crore would be required to dilute at least ₹15,000 crore and 1% of post-issue capital, with a minimum dilution of only 2.5%. This is a considerable drop from the existing requirement of 5% for companies over ₹1 lakh crore.
Extended Compliance Timelines
SEBI further suggested stretching the timeline for meeting the compulsory 25% minimum public shareholding. Large issuers would get up to 10 years to achieve it if they issue with below 15% public shareholding and five years if they begin above 15%. This phased concept seeks to ease short-term dilution pressure while maintaining eventual compliance with public shareholding norms.
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Market Impact and Industry Response
The reversal of policy has been appreciated by market participants who considered the initial proposal as being potentially restrictive. By keeping the 35% retail quota intact, SEBI has retained the democratic nature of India’s IPO market while also attending to genuine concerns of large issuers regarding market absorption capacity.
Industry observers pointed out that this solution is a better balance between enabling big firms’ listing ambitions and retaining retail investor access to primary market opportunities. Another framework of cutting minimum dilution requirements allows issuers the flexibility they had been looking for without undermining retail participation.
Looking Forward
SEBI has sought public comments on the revised proposals till September 8, 2025. The regulator’s willingness to go back on its decision in response to stakeholder input indicates its determination to ensure market balance and safeguard investor interests and facilitate the formation of capital.
This U-turn is an important moment in Indian capital markets policy, reaffirming the principle that the role of retail investors is at the heart of equity market democratization efforts in the country, even as the market increasingly includes ever-larger corporate issues.
