Mumbai: The country’s stock market regulator has shot down a proposal to digitize at one go the processing of applications for initial public offerings (IPOs), which aimed at narrowing the time taken from the filling of application forms to the allotment of shares or refund of money to less than five days from three weeks.
Instead, it has suggested a phased roll-out of the electronic format.
The conversion to electronic format was a key recommendation in a report submitted recently by the Group on Review of Issue Processes (GRIP), a Securities and Exchange Board of India (Sebi) sub-committee that was constituted to help improve the infrastructure of the primary markets.
Digitalization desirous: Sebi chairman C.B. Bhave. (Photo: Ashesh Shah/ Mint)
Sebi chairman C.B. Bhave and members of the primary market advisory committee have turned down the suggestion, saying it was not feasible, and have asked GRIP to submit a fresh report in three weeks, a member of the advisory committee who did not wish to be identified said.
Bhave has suggested a phased roll-out of the electronic process, citing his experience in implementing the dematerialization system at National Securities Depository Ltd (NSDL), the advisory committee member said. Bhave was heading NSDL before he became the chairman of Sebi.
A Sebi official declined to comment on the issue.
Bankers, too, prefer a phased roll-out, though they insist a conversion to electronic format is necessary. “If broking can happen electronically, then I believe IPOs can also be done electronically, but such a change is always desirable in a phased manner,” said Girish Nadkarni, executive director of investment bank Avendus Capital.
Another GRIP recommendation that did not find takers was that IPO applicants should issue cheques in the name of their brokers. “Such a move would have led to lot of misconceptions among small investors, who may not be comfortable in giving money in the name of the broker,” said the advisory committee member.
GRIP, comprising members of Sebi’s primary market advisory committee, was constituted in 2007 to suggest reforms to improve the infrastructure of the primary market, which allows companies to raise money from investors.
Currently, it takes about 21 days to close an issue. For a typical IPO, the data entry happens in three stages. Brokers, who form a syndicate, key in the bid details of each applicant into the IPO software provided by stock exchanges after getting the application forms.
The bankers to the issue then collect the forms and prepare a statement with financial details such as the cheque number and the bid amount. Once this process is completed, the application forms move to the registrar, who feeds in other details such as the applicant’s address and validates the demat account number.
Finally, the registrar completes the verification, finalizes the basis of stock allotment to each category of applicants, gets it approved by the stock exchanges and the issuer company’s board, and credits the shares to the applicant’s demat account. The refund of application money to unsuccessful bidders is completed within two working days after the share allocation.
The idea of an electronic format for fresh market listings has been floating around for some time.
In 2004, when the government divested its equity stake in five large public sector entities, including Oil and Natural Gas Corp. Ltd, some investors were allotted more shares than what they had applied for.
This prompted Sebi to set up the Securities and Markets Infrastructure Leveraging Expert (SMILE) task force to look into the primary market infrastructure. The task force’s key recommendation was that the process of filing applications and data entry by banks and registrars should be handled online.
Last year, members of Sebi’s primary market advisory committee formed GRIP to look into the process again.
In 1996, when the system of storing shares was converted to the electronic format, it was initially restricted to certain foreign institutional investors and a limited number of company stocks. Based on satisfactory results, compulsory dematerialization was extended to all listed stocks. The conversion to paperless trading took nearly five years.