Since Just Dial’s listing in June last year, its shares have tripled. Those of Snowman Logistics are expected to list at a huge premium, if grey market prices and subscription numbers are an indication. Both companies had only 10 per cent reservation for retail investors, as they didn’t meet Sebi’s profitability route requirement. And, both IPOs had seen huge oversubscription in the retail segment.

“The 10 per cent reservation is too small — 2.5 per cent of the overall paid-up capital, if the company dilutes 25 per cent in the IPO. The rule was introduced in 2012, when IPOs of a lot of non-profitable companies had hit the market. However, it needs a rethink, as we need more retail participation in IPOs,” said the head of a domestic investment bank.

The Sebi rule states an issuer should have an average pre-tax operating profit of at least Rs 15 crore for the past three years, failing which it either has to list on the SME platform or carry out an IPO with increased qualified institutional buyer (QIB) participation of 75 per cent. For such issues, the retail and high net worth individual quotas are 10 per cent and 15 per cent, respectively.

“The rule is to protect small investors from loss-making companies. In certain cases, loss-making companies have done very well. So, one can argue retail wasn’t involved fully in the IPO stage. It’s not the most ideal rule, but it’s a good provision to safeguard investors from IPOs of non-profitable companies which, typically, don’t tend to make good returns for investors,” said Prithvi Haldea, chairman and managing director, PRIME Database.

Investment bankers say the profitability rule might go against small investors in IPOs of e-commerce companies such as Flipkart or SnapDeal, which might tap the capital market in the next few years. “None of the e-commerce or dotcom companies expected to come out with IPOs in the next few years are profitable,” said the banker quoted earlier. Most high-growth companies in the technology space aren’t profitable in India alone, but globally as well.

Some experts, however, say the rule is to protect retail investors from companies with volatile earnings, adding one shouldn’t complain if this goes against at times. “You can’t have it both ways. If it is a loss-making company, it has to be backed by institutional participation. Retail can buy it from the secondary market if they believe in the long-term growth of the company,” says Girish Nadkarni, managing director, Motilal Oswal Investment Banking.