If you want to apply for an initial public offer (IPOs) through an intermediary such as stock brokers, depository participants and registrar and transfer agents, you will now need a Unified Payment Interface (UPI) ID to do so. UPI facilitates instant money transfer between any two entities’ bank accounts, and is expected to bring greater digitization to the IPO process.
The Securities and Exchange Board of India’s (Sebi) rule for retail investors came into effect on 1 July 2019, and the earliest IPO to test this rule opened on 29 July—Affle India Ltd’s IPO was open till 31 July.
The UPI mechanism will be required if you are submitting bid forms through intermediaries by blocking the amount using ASBA (Application Supported by Blocked Amount). ASBA ensures that the investment amount is debited from a person’s bank account only after the IPO application is selected for allotment.
If your bank has not signed up to offer the UPI facility for IPOs, you will not be able to apply through an intermediary. Investors putting in their bids through self-certified syndicate banks (SCSB) can continue using the bank account to block the bid amount.
“There will be some teething issues in the process but they should smoothen out. The participation of an adequate number of banks is essential for wider retail investor participation," said Ajay Menon, managing director and chief executive officer, broking and distribution, Motilal Oswal Financial Services Ltd.
While Sebi announced the addition of the UPI mode of payment for retail investors applying for IPOs through intermediaries in November 2018, the current move is the second phase of its implementation. Phase I was implemented in January 2019, where the UPI payment option was offered along with the existing process.
Though now only the UPI mechanism will be available for retail investors applying through intermediaries, the processing time will still be T+6 (the investor’s money is blocked for six days before allotment). Phase II will run for three months or tested through five large IPOs, whichever is later, before phase III begins. In phase III, the processing timelines will be reduced to T+3 since the UPI mechanism would have been tested and the issues ironed out.
“The intermediary is now better able to service IPO clients with advice as well as execution unlike earlier when it had to be done only though banks," said Menon. “There is greater flexibility for clients to approach it whichever way they want," he added.
The move to digitize was aimed at reducing the processing timelines in public issues from the existing T+6 to T+3. UPI eliminates the need for physical movement of ASBA applications from intermediaries to SCSBs and, thus, could bring greater efficiency. “The investor’s money will be blocked only for three days instead of the existing six days and that is a significant benefit," said Menon.
How to use
When filling the IPO application form, you (the sole or first applicant) will have to mention your UPI ID in the section where the payment details have to be provided. Once you submit the completed form to the intermediary, the information will be electronically uploaded for processing.
You will then get a mandate request from the sponsor bank on your phone linked to the UPI account for authorizing blocking the required amount under ASBA. Before validating the request, you should check the details provided in the mandate, such as the name and PAN card number and the IPO details. You will need to authorize the transaction using the UPI PIN. The authorization will then be electronically sent to your bank and the amount is blocked.
Since there is no physical movement of documents unlike earlier when the application had to be physically sent from the intermediary to the SCSB for the amount to be blocked, the time taken to complete the process is quicker. With the UPI PIN being used to authorize blocking the amount, cases of an application being rejected on mismatch in signature are eliminated.
You will have the option to cancel or modify the bid till the closure of the issue through the same intermediary. In case there is an error in providing the UPI ID details or the UPI PIN, the transaction will have to be re-initiated by approaching the intermediary.
Once the issue closes and the basis of allotment is decided, depending upon the shares allotted, the required amount will be debited from your account and the rest of the blocked funds released.
Things to remember
The limit for making application in an IPO using UPI is ₹2 lakh. Also, you can make only one application in an IPO. You must only use your own UPI ID as third-party payments are not permitted.
For bids placed through an intermediary, you must provide only the UPI ID and not the bank account number and details for blocking the amount in the application form. The application is liable to be rejected if both bank account details and UPI information is provided or only bank account details are provided.
If you are making an application using the UPI mechanism, ensure your bank offers UPI facilities for public issues and that your account linked to the UPI is adequately funded.