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Initial Public Offering – “Modernisation”

There is much happening on the IPO modernization front. The two proposals making rounds for the same are: 1) Reduce the time to market. 2) Only block the money for IPOs, not actually pay for it. The former proposal means that SEBI is proposing to shorten the time taken by the entire IPO process, especially the time between closure of the issue and allotment and then the time between allotment and listing. This will be surely of benefit to the investors in the sense that the valuable little money they have will not be locked in for an extended period. Moreover, as the QIBs, at the time of application pay 10% of the total amount, whereas the retail investors have to pay full 100% of the amount Therefore, if this window is reduced, the small investors would quickly have the money back in their pockets.

Coming to the second proposal, this looks like a turn on for the primary market. This actually questions the practice of paying upfront for shares that you are not even sure of being allotted. This practice sounds a bit illogical… At the time of over subscription, you end up getting allotment of only a fraction of shares you applied for. Then why to pay full money for all the shares at the time of applying for the shares? The reason behind paying the full amount is that the stock issuing company needs to be certain about your commitment and that it should get the money on time once the shares are allotted to you. But the same thing can be achieved in another way, which the SEBI has come out with, by earmarking or blocking the money in your account. The money stays in your account during the entire IPO process, and gets deducted only when you are allotted the shares. This new IPO payment and refund process launched by SEBI is – Applications Supported by Blocked Amount (ASBA).

Now what is this all about?

Applications Supported by Blocked Amount (ASBA) payment method for IPO?
Introduced in July 2008, Applications Supported by Blocked Amount (ASBA) Process, is the alternative payment method (optional) for IPO application where the IPO bidding amount remains in investors account, but blocked by the bank until allotment is done. This is an additional method of payment, available exclusively for retail individual investors through Self Certified Syndicate Banks (SCSB’s). The purpose of adding this new payment option is to reduce the turn around time for IPO Stock listing and to make the refund process faster. Technically there is no refund process for this kind of payment option as only the required money for allocated shares is withdrawn from the investors account. Investor can use the remaining money as soon as the required money is withdrawn and the money gets unlock. As companies cannot list there shares before completing the refund process, ASBA will reduce there load on refund process and ultimately will make the listing process faster.

What are the basic requirements to apply in an IPO using ASBA process?
1. Only retail individual investors have ASBA facility at this time.
2. The bank where investor has account should be a ‘Self Certified Syndicate Banks (SCSBs). The list of the SCSB’s is available soon on SEBI’s website.
3. An investor can only apply at cut-off price. Once submitted the bids cannot be revised. Investors are allowed to withdraw the application before issue gets close.
4. The application amount (total bid amount) for IPO application will remain locked until allotment is done. An investor cannot withdraw the money in locking period.

Some related FAQs on ASBA:

Who are Self Certified Syndicate Banks (SCSBs) and how do I know if my bank has the facility to apply in an IPO using ASBA payment method?
Banks, which are certified by SEBI, allow retail individual investor to apply in IPO’s using ASBA payment method, are known as ‘Self Certified Syndicate Banks (SCSBs)’. SCSB’s has capability to block the IPO Application amount until IPO allotments are done. SCSB guarantee the Issuer Company for the blocked money and make sure that it’s not being used for any other purpose. Bids can be submitted online through Internet banking websites or by visiting the branch office of the bank. Once receiving the IPO Application from an investor, SCSB’s sends the bidding information to BSE/NSE electronically. After allotment, Issuer Company or the registrar of the IPO withdraw the required money from the bank account and unlock the remaining amount for investor to use immediately.

Detail process flow for ‘Applications supported by Blocked Amount (ASBA)’ payment Option.
1. Self Certified Syndicate Banks (SCSBs) accept retail individual investors bid for IPO Shares through Internet banking or at certain designated branches.
2. Investor receives the acknowledgement from the bank along with the IPO Application Number.
3. Bank blocks the amount in investor’s bank account for the IPO as applied and send the application information to the designated stock exchanges for that IPO. In case of insufficient amount in investor’s bank account, the bank can reject the IPO application and do not sent the bidding to stock exchanges.
4. Banks keep the physical forms or electronic date (in case of online IPO Application) for specified period of time.
5. IPO Registrar receives the final bidding information from stock exchanges soon after issue gets closed. ASBA applications are processed along with the other IPO applications.
6. IPO Registrar validates the bids and rejects the application that doesn’t match the application requirements.
7. Registrar completes the ‘Basis Of Allotment’ and gets it approved from stock exchanges.
8. Registrar sends request for money to SCSB’s to transfer money to escrow public issue account.
9. Registrar receives the money and transfers the allocated shares to investors Demat Account.

I do not have bank account with SCSB’s listed on SEBI website. Can I still apply in IPO’s using ASBA payment option?
To apply in an IPO using ASBA payment method, an investor should have account with SCSB. Even if your bank is listed as SCSB, only few of its branches may have ability to process IPO Applications with ASBA payment option. So one needs to contact the nearest branch to check if they have this facility available or not.

Will bank charge any additional fees from there customers if they choose ASBA IPO Payment Option?

List of SCSB is as under: (As on 12/09/08)
Name of the Bank
1. Corporation Bank
2. Union Bank of India
3. HDFC Bank
4. State Bank of India
5. ICICI Bank Ltd.
6. IDBI Bank
7. Axis Bank
8. State Bank of Bikaner & Jaipur
9. Bank of Baroda
10. Kotak Mahindra Bank

*This list will be updated on the 1st day and 15th day of each month

As of now, there is no information available if banks will charge additional fees from investors or from the issuer company to handle this process.

When the banks will need money in customers account to lock for ASBA payment option?
Bank will need the money in investor’s account at the time of placing the bid for IPO shares through ASBA payment option. SEBI has clearly instructed that banks will not accept IPO application before blocking the bidding amount (for ASBA process). The amount will remain locked until registrar / stock exchange request bank to release the fund either because the investor didn’t receive the allotment, IPO application got rejected or investor withdraw the IPO application.

Can an investor apply on ‘Lower Price Band’ using ASBA payment method?
No. In the current form of ASBA, retail individual investors can only apply at cut-off price to use ASBA payment option.