Mumbai: Companies and so-called high net-worth individuals, or HNIs, will be able to use the banking channel to buy stocks in the primary market from January, two people familiar with the development said.

Capital market regulator Securities and Exchange Board of India, or Sebi, allowed, starting July 2008, retail investors to subscribe to initial public offers, or IPOs, through bank branches. In the second phase of this plan, slated to go live in January, the channel will be thrown open to a wider group of investors who will be able to make multiple applications at different price points within the price band of an IPO. Sebi has asked bankers to get their systems ready for this by 31 December.

Most IPOs are made through the book-building route where the company selling shares prescribes a band and investors bid for shares at a certain price, helping arrive at the final issue price.

Till now, only retail investors were allowed to bid through the banking channel at the cut-off price for IPOs, which is usually the upper end of the price band. The maximum amount for such bids was capped at Rs1 lakh.

These restrictions have kept out large investors from this channel. Going by Sebi rules, between 25% and 35% of an IPO is reserved for retail bidders, 15% for non-institutional bidders, including HNIs and corporations, and the rest for institutional investors.

A senior Sebi official who did not want to be identified told Mint that the regulator wants all IPO transactions to be routed through this channel and, once this is done, the time taken between a public issue and its listing can come down to seven days from 21 days now.

So far, 24 banks offer this channel known as Asba (application supported by blocked amount).

When an investor applies for shares in an IPO through this channel, funds do not immediately flow out of his or her account. The bank blocks the money—the value of shares applied for—and until the shares are allotted, the fund does not leave the account of the investor. However, because the money is blocked, a customer can’t use it.

Sebi has asked banks to be ready with new software in January that will allow multiple bids. At least 30 firms have filed draft offer documents with the regulator, many of them real estate players, to offer shares to public. Since foreign funds make fresh allocations in January, many of these IPOs will hit the market in early 2010.

“There was a meeting of bankers with Sebi on Friday. We have been asked to make necessary changes to our systems. We are on the job. The system is likely to be ready by December 31," said V.S. Ramamoorthy, chief manager and in-charge of implementation of Asba at the Chennai-based Indian Bank.

“The second phase of Asba is likely to go live by January. The Rs1 lakh cap will go. And five bidding options will be made available for each account," said an executive at a private bank, who did not want to identified as he is not authorized to speak to the media.

The provision for multiple bids will clear the way for high net-worth individuals and corporate investors to participate in the channel.

Sharad Rathi, head, investment banking, Almondz Global Securities Ltd, a Mumbai-based investment bank, said the move would also reduce funding costs for the investors.

At present, when an issue is oversubscribed, an investor does not get as many shares as he or she has applied for and the company needs to refund the extra money paid. Usually, when an investor applies for stocks and issues cheques, he or she receives the refund after three weeks. If the banking channel is used, the money is released instantly on the date of allotment.

This could save interest costs for up to a week, when there is external funding for IPOs. “To that extent, the borrowing costs will come down," Rathi said.

Arun Kejriwal of Kejriwal Research and Investment Services Ltd said investors applying with their own funds could get the money released a week earlier than they usually do. “In case of external funding, even now the high net worth individuals pay interest for 13-14 days. The registrar gives the cheque for applications funded externally on day one, while cheques for self-funded applications are despatched over the next seven days."

For these investors, the cost will come down only if the listing time is reduced to seven days, he said.

Sebi introduced the new channel for retail investors partly to address investor complaints over the delays in refunds.

Bankers were not too excited about this channel initially for lack of incentives. In Mahindra Holidays Ltd’s IPO, just 300 out of 50,000 retail applications came through the banking channel. Similarly, in the Adani Power Ltd IPO, out of 579,000 applications, around 6,000 came through the direct banking route.

In August, Sebi said banks would be eligible for commissions as a percentage of the value of bids processed by them. Following this, banks have started offering this channel aggressively. Sebi chairman C.B. Bhave had said in a conference in November that close to 20-25% applications in the past three months have come through Asba.

A bank official who did not want to be identified said bank-owned brokers such as and HDFC Securities Ltd have shifted their business to Asba, while most other brokers still prefer the cheque route.

Rathi of Almondz Global said: “Even now, over 70% of the investors come through the traditional channel. Many investors do not even know such a process is available. Banks should take the initiative to spread?awareness."