The Securities and Exchange Board of India (Sebi) has recently introduced a new payment mechanism for the benefit of certain investors applying in initial public offerings (IPOs) or a rights issue of shares (that is, where additional shares are offered to existing shareholders of a listed company on a preferential basis).

Illustration: Jayachandran / Mint

This new payment mechanism is called Applications Supported by Blocked Amount (Asba) and, in order to effectively adopt and implement it, Sebi has amended the master regulations governing the issue of shares in India, the Sebi (disclosure and investor protection) Guidelines, 2000.

Asba was introduced with effect from 1 September as an additional payment mechanism required to be made available in only those IPOs where the price is discovered using the book-building method.

Asba made its debut on 8 September, with the opening of the IPO of a company called 20 Microns Ltd, and nearly 10% of the retail individual investors who applied for this IPO opted to do so using the Asba facility. In keeping with Sebi’s trend of streamlining various processes in the capital market, Asba was also implemented for rights issues on a pilot basis with the rights issues of Tata Motors Ltd and Sadhana Nitro Chem Ltd.

In IPOs, the Asba facility is available to retail individual investors (individuals applying for Rs1 lakh or less) who agree to bid at the cut-off price and give a single option as to the number of shares applied for.

The cut-off price is a price within the price band determined by the issuer company in consultation with its book-running lead managers and a bid at cut-off price is a valid bid at all levels within the price band.

The Asba facility has not been limited to retail individual investors in the case of rights issues. All existing shareholders of a company undertaking a rights issue may avail the Asba facility, provided they hold their existing shareholding in dematerialized form and apply for issuance of dematerialized shares under the rights issue as well.

Briefly, this is how the new payment mechanism works in an IPO: An eligible investor using Asba places his bid, either in physical form or electronically through the Internet banking facility, with a designated branch of a self-certified scheduled bank (SCSB) with which the investor maintains a bank account. SCSBs are banks registered under the Sebi (Bankers to an Issue) Rules, 1994, and notified by Sebi as eligible to offer the Asba facility to investors (these include banks such as HDFC Bank, ICICI Bank and State Bank of India).

Upon an applicant placing a bid with an SCSB, the SCSB blocks an amount equal to the application amount in the bank account of the applicant and uploads details of the bid on the electronic bidding system of the designated stock exchange through a Web-enabled interface. The application money remains blocked in the applicant’s account until the basis of allotment of shares is arrived at and appropriate instructions as regards unblocking the amount are issued by the registrar to the issue to the SCSB.

In case a bid is successful, the account of the applicant is unblocked and the appropriate amount is transferred to the issuer company’s account, in lieu of which the applicant is issued shares by the issuer company. In cases of unsuccessful bids or where a bid is withdrawn by the applicant, the blocked amount is simply unblocked and becomes available for use by the applicant.

This new payment mechanism is primarily aimed at achieving the objectives of: (i) dispensing with the concept of refund of share application money; and (ii) reducing the time period for listing a company.

The process of refunding the share application money can be cumbersome and often has investors waiting for long periods before they can get refunds.

Further, since a company can be listed only after the refunds in relation to unsuccessful or withdrawn bids have been made, a delay in making refunds consequently delays listing of the issuer company on the stock exchange(s).

The Asba mechanism for IPOs is not without its drawbacks. The model may curtail certain flexibilities which are available to retail individual investors under the traditional system of payment by cheques.

Investors availing the Asba facility can only bid at the cut-off price and for a single option as to the number of shares applied for. Under the traditional mode of making applications, bidders can give up to three such options while placing their bids. Further, Asba bidders are not permitted to revise their bids or bid under any of the reserved categories.

Despite this, Asba has been welcomed by most market intermediaries. Importantly, the mechanism provides investors with a payment option that helps them apply for shares without actually parting with their money and without having to worry about delayed refunds.

It also furthers Sebi’s objective of reducing the time period between a company’s public issue and the listing of its shares on the stock exchange(s).

While Asba’s effectiveness would have to be judged in a long-term contrast (especially when the markets are more buoyant), prima facie, the mechanism seems to provide an impetus for greater participation by small investors in IPOs and rights issues.

This column is contributed by Manjari Tyagi of AZB & Partners, Advocates & Solicitors.

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