ASBA: Good For Retail, Confusion For Institutions

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Application supported by blocked amount or as it is popularly called ASBA is a process in which investors while applying for the IPOs don’t have to deposit the whole of application money upfront. In contrast, in this system whole of the money remain deposited in investor’s bank account and he will be eligible to earn interest on the money earmarked for IPO application. Only thing he has to do is to block the amount in his bank account for the IPO application. A number is generated about this block amount which will be written on the application and when allotment is done the calibrated amount (equal to the value of share allotted) is then transferred to the company’s account. This process is certainly a masterpiece for the investors, especially retail ones but institutions are not finding it very suitable. Not to be mentioned that ASBA was introduced in September 2008 for retail investors and it was allowed for institutions at the start of 2010. If we go by the information received by the registrars then ASBA is picking up slowly but steadily among the retail investors. At the same time, from the perspective of institutions this process has take a vital turn in the eye of new development regarding the bid amount rule by SEBI.

For Institutions ASBA Is The Only Way Out
Recently, SEBI has come out with a guideline saying that from May 1, 2010 onwards all the institutional investors, i.e. QIBs have to deposit whole of the application amount with their applications of IPO unlike the earlier practice where they just have to deposit 10 per cent of the bid amount at the time of application. This new rule has itself scripted a new framework for the way money is invested in IPOs as well as for ASBA.

Though experts are predicting this to be a dampener for the institutions as they have to arrange a huge sum at one go that is very difficult for them, but at the same time market participants are also taking positives from the fact that now it wouldn’t be possible to manipulate the IPO response by these QIBs as in the past where they go out all open to bid in great numbers, thereby attracting retail investors for the issue and trip at the last moment as only 10 per cent amount was involved for the bidding. In the changed circumstances QIBs will certainly looking to go for ASBA route as money they invest into IPOs are huge amount and via ASBA they can earn valuable interest on the amount so applied to IPOs. On the procedural part SEBI’s step to allow institutions to apply through ASBA is expected to cut the procedural delays between IPO closing date and its listing and in future it would be possible to list the shares within 7 days of its closing, which is a well thought target of the SEBI.[PAGE BREAK]

Another interesting point came into play by this new rule is related to FIIs. For FIIs, the amount blocked in the account under ASBA is usually in forex and they have to pay in Rupee. So there might be a case in which they have to make out for forex fluctuations losses in the amount so blocked.

Benefits Are Plenty But Miles To Go
One of the biggest reasons for ASBA not getting desired response from the investors is that ASBA eats out the share of commission of distributors and intermediaries. This being the reason they don’t want to promote this route but if sources are to be believed than SEBI is very much serious in making ASBA a success. In fact SEBI has convened n number of meetings in this regard but question arises, why SEBI is so much serious? Strategically, ASBA is directly related to SEBI’s cause of reducing time for IPO from currently 21 days to 5-7 days as it reduces the time lag between the application made and the ultimate refund of money applied as no refund of money is required, also it reduces paperwork for the registrar of the IPO. Also this process can prove to be very handy for the institutions, as they have to invest a large sum of money in the IPOs and to them even interest of 1-2 days could be huge.

This can be gauged from the fact that in last year IPO of Reliance Power around Rs. 8 lakh crore was accumulated as application money and we can imagine the interest forgone for them in this investment which is usually for at least 3 weeks. Another unusual benefit is that in this process the underlined amount is blocked in the account of the applicant and he can not unblock it even if he wants. In that condition, company should not be bothered about honouring of the cheques which is not there in conventional method where an investor can dishonor the cheques even after applying for the IPO. In spite of these benefits still there is a long way to go in making ASBA a process to be banked upon and SEBI is certainly working on it and by the end of this year we may see listing process shrinking to just 7 days’ time frame.