Mumbai: At least 50,000 retail investors applied for shares in the June initial public offering (IPO) by Mahindra Holidays and Resorts India Ltd, which received demand for three times the portion of stock offered to this class of investors. But just 300 investors used a new banking channel to subscribe to the shares.
Even for Adani Power Ltd’s IPO, which closed on Friday, few retail investors used the new bank channel. Out of 579,000 applications, just around 6,000 came through the direct banking route.
Tough call: The Sebi headquarters in Mumbai. The banking channel, introduced by Sebi for retail investors to subscribe to shares, has been slow to take off because of a conflict between banks and brokers on commissions. Abhijit Bhatlekar / Mint
State Bank of India’s civil hospital branch in Ahmedabad, one of the outlets designated to collect IPO applications, has not received a single application for the Adani Power issue, said R.P. Goel, branch manager.
The capital market regulator, Securities and Exchange Board of India (Sebi), introduced the banking channel in July 2008 for retail investors to subscribe to shares, partly to address investor complaints over the non-receipt of refunds in IPOs. But it has been slow to take off because of a conflict between banks and brokers on commissions.
When a retail investor applies for shares in an IPO through banks, funds do not immediately flow out of his/her account. The bank blocks the money, corresponding to the value of shares applied for, and until the shares are allotted, the money does not leave the account of the investor. However, because the money is blocked, a customer can’t use it.
When an issue is over subscribed, an investor does not get as many shares as he/she has applied for and the company needs to refund the extra money paid. In the normal course, when an investor applies for stocks and issues cheques, he/she gets the refund after three weeks. If the banking channel is used, the money is released instantly.
Despite this, the channel is not being used widely by investors because brokers perceive it as a threat to their revenue, according to investment bankers and other IPO service providers.
While banks say they are not getting any incentives for collecting IPO subscriptions, brokers are unhappy that their business is being taken away by the banks and they are losing out on commissions.
Sebi notified the bankers eligible to operate in this new channel in September 2008. Since then, only four companies have raised money. Alkali Metals Ltd raised Rs40 crore in October and EdServ Softsystems Ltd raised around Rs20 crore before the Mahindra and Adani Power IPOs.
With at least two big issues waiting in the wings—NHPC Ltd and Oil India Ltd—the regulator is keen on ironing out the glitches. Sebi recently discussed the issue with investment bankers.
One of the critical issues was the fee paid to the brokers by the company for collecting applications.
Typically, in IPOs, the application contains a stamp of the broker with the name and code. The registrar collects these applications and punches in the details into an online stock exchange platform; the brokers and sub-brokers get an incentive of up to 1% of the amount invested by a customer. If a customer enters a bank and submits his/her form directly, the bank doesn’t get any fee.
Normally, it takes three weeks before shares in an IPO are allotted, enabling banks to keep the money for the duration.
Earlier, the money accrued to bankers to the issue. Under the new system, the banks that collect the applications will keep the blocked amount. There are 19 such banks.
But the brokers stand to lose as the bids are entered into directly by the banks, approved by Sebi, and banks normally do not maintain any records of brokers who help them collect these applications.
This reduces the motivation of a broker to use the direct banking route, said M.V. Ramnarayanan of Link Intime India Ltd, a Mumbai-based registrar of public issues.
Without sufficient support from these intermediaries, it will be difficult to get the investors to use the new route. S. Subramanian, head of investment banking at Mumbai-based Enam Securities Ltd, said: “IPOs are not bought. They are sold. So it is for the intermediaries to take it (the new banking channel) to the investors.”
S. Vishvanathan, managing director and chief executive officer of SBI Capital Markets, the investment banking arm of the country’s largest lender, State Bank of India, said, “The matter was discussed in a recent Sebi meeting with investment bankers. One of the reasons identified for the lukewarm response is the indifference of intermediaries. Brokers who sell the IPO forms and collect commissions find it easier to take the cheque route. Also, banks do not have any incentive for providing the services and do not encourage brokers bringing them work.”
B. Narasimhan, vice-president, Karvy Computershare Pvt. Ltd, the registrar that handled both the Mahindra and Adani IPOs, said: “Before each IPO, we send about four lakh emails to potential investors explaining the benefits of direct banking applications. But it has not got the response it deserves.”
The regulator is also considering ways to incentivize banks to get proactive, according to an investment banker who attended the Sebi meeting and didn’t want to be named. The capital market regulator is working on ways to resolve the issue of sharing of incentives between brokers and bankers.
A senior official from ICICI Securities Ltd, the broking arm of ICICI Bank Ltd, said, “It’s an issue of sharing the commission between bankers and brokers. We need to find a middle path to keep both the parties content. We expect a solution soon.” The official didn’t want to be named.
Convenience is another factor behind the lukewarm investor response to the banking channel. According to Mayank Shah, CEO, retail business, Anagram Securities Ltd, a Mumbai-based brokerage, it is more convenient for investors to write cheques and attach them with the IPO application forms. Otherwise, they have to visit the bank to get an acknowledgement for blocking the amount in the account and attach it with the application.