Although there were reports about this in the recent past, SEBI yesterday formally notified reforms in relation to the payment process for resident retail investors in IPOs. Under this process, these retail investors do not have to make any payment when they bid for shares in the bookbuilding process, and then wait for refunds in case they do not obtain full allocation on the shares they applied for. Instead, SEBI has devised a method whereby the bank accounts of the investors will be blocked to the extent of the value of the applications they make.
The process is described by SEBI as follows (wherein “ASBA” stands for Applications Supported by Blocked Amount, and “SCSB” for Self Certified Syndicate Bank):
“An ASBA investor shall submit an ASBA physically or electronically through the internet banking facility, to the SCSB with whom the bank account to be blocked, is maintained. The SCSB shall then block the application money in the bank account specified in the ASBA, on the basis of an authorisation to this effect given by the account holder in the ASBA. The application money shall remain blocked in the bank account till finalisation of the basis of allotment in the issue or till withdrawal/ failure of the issue or till withdrawal/ rejection of the application, as the case may be. The application data shall thereafter be uploaded by the SCSB in the electronic bidding system through a web enabled interface provided by the Stock Exchanges. Once the basis of allotment is finalized, the Registrar to the Issue shall send an appropriate request to the SCSB for unblocking the relevant bank accounts and for transferring the requisite amount to the issuer’s account. In case of withdrawal/ failure of the issue, the amount shall be unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.”This would certainly streamline the application process for retail investors as it would no longer require applicants to wait for refunds in case their applications are not accepted in full.
A detailed post in the Indian Capital Markets blog analyses SEBI’s proposal to introduce hard underwriting. As of now, the concept of hard underwriting exists only in the case of fixed-price public offerings (which are out of fashion these days) and not in the case of bookbuilt public offerings (which have become the norm).
The author gives several reasons why hard underwriting would not be effective in the Indian market conditions, and that efforts instead must be taken to improve some of the other aspects of public offerings by Indian company. The post also details some of the processes involved in Indian IPOs.