Mumbai: Stock market regulator Securities and Exchange Board of India, or Sebi, is looking to introduce from 1 July a new payment mechanism for initial public offerings (IPOs) where application money will remain in an investor’s bank account until allotment of shares is finalized by the issuing company. But, this will happen only in some centres because not all banks are equipped with the technology to provide this service.
The automatic payment mechanism for IPOs and rights issues will be based on an electronic form of the stock invest scheme some banks launched in 1992, and it will be rolled out in phases starting July, according to a senior official at the market regulator who did not wish to be named.
The new payment mechanism, based on the recommendation of Sebi’s primary market advisory committee, was announced by the regulator on Tuesday as a way to make the primary market more efficient and transparent.
The stock invest scheme was offered by some banks to IPO investors when they were also the bankers to the same IPO. Under this, investors’ money would remain locked in their bank accounts until the shares were allotted. Sebi wants to make this a universal primary market mechanism.
“At least four banks, including State Bank of India (SBI), and Axis Bank already have the technology to lock the money in the bank account. In the next few months, more banks will come up with the facility,” said the Sebi official.
The Sebi directive is, according to a senior official at SBI, simply an extension of how some banks deal with “trading accounts” to the IPO market.
The concept is based on the “lien marking” practice. Under this, if a person wants to trade, the trading amount is locked by the bank and a confirmation is sent to the broker about the availability of the fund.
When the broker carries out the trade, the amount is transferred from the customer’s account to the broker’s account.
“Basically, the facility is an extension of this technology. Only that, most probably, banks would have to tweak their systems a bit. It might take some time before banks across the board implement it,” added the SBI official who did not wish to be identified.
According to a senior executive at SBI’s capital market arm, SBICAP Securities Ltd, Sebi had sought suggestions on how to expedite the IPO process from the existing 21 days to seven days. Sebi plans to kick-off its reforms by cutting down the time between a firm’s public issue and the listing of its stock.
SBICAP and a few others had suggested the “lien marking” process for the IPO market.
“When you apply for an issue, the amount gets stuck for 21 days and you don’t get any interest. You don’t even know when you are going to get the cheque back,” said the SBICAP official, who also did not wish to be identified. “It’s (Sebi’s new move) definitely a very investor-friendly initiative. Most of the institutions (investing in an IPO) actually contribute 10% of their bid (application money), whereas the individual investor puts in 100% of his bid. And the entire amount is stuck in the system for about a month,” he added.