Shrenikbhai Shah, an individual stock market investor wears a grim look these days whenever he is dragged into a conversation by his friends on recent IPOs and profits made thereafter. Shah though applied for subscription of over half-a-dozen IPOs in last less than six months, unfortunately could end up being allotted only less than 50 shares from six applications submitted under through his bank. At times he blames his fortune, sometimes he believes there are some loopholes in the allotment systems not allowing him to get more shares and in few occasions he even prayed before his favourite God on the listing day seeking his divine intervention for more stocks allotted in his account. Nothing has worked really so far. There are thousands of individual investors like Shah around us in these days of IPO hoopla. Here we make a sincere attempt to discuss in detail almost every possible aspect related to IPO allotments, investment on the listing day, wiser decisions evolving IPO applications and other pros and cons.

FY16 remained an IPO centric financial year and its magic will continue to enthral the investors in FY17 also. Q1FY17 was a magnificent quarter and laid a red carpet for investors. Under such a rosy scenario, one must understand few things which we discuss hereon.

BREAKTHROUGH IN IPO APPLICATION:

Primary markets have witnessed a virtual outcry during 2016. The IPO activities heated up when the companies were striving to come up with public offers amid much responses from investors. Out of 13 companies listed in the bourses IPOs since January this year, 12 have been listed at a premium making investors smile broad. The companies together have raised `9300 crores as against `1200 crores raised in 2013-14 and `13600 crores raised during the entire year in 2015.

Where every day a new application is hitting the primary market, efforts are being taken by market watchdog SEBI to make the IPO listing process viable. One of the biggest revolutions so far is the launch of ASBA, where investors don’t need to lock their money in IPOs but just block in their banks till allotment.
[PAGE BREAK]

WHAT, WHY, HOW OF ASBA?

ASBA (Applications Supported by Blocked Amount) supplements the traditional method of issuing cheques for making payment in an IPO application. Several IPO scams had shaken the stock markets in the past where shady operators disgorged illegal gains made by locking the applicants’ money and delaying the recovery on non-allotment.

ASBA forms are either available in the designated branches of nationalised banks acting as Self-Certified Syndicate Banks (SCSBs) or electronically accessible through internet banking facility. Investors receive a counterfoil once the forms are submitted with the respective branches. ASBA application forms are different from the regular ones used for issuing among public. The withdrawal of bid process has also been made easy where the withdrawals made during the bidding period gets deleted immediately and the money gets unblocked. Investors need not have a DP account with the SCSB, when they are submitting the ASBA forms.

To make the availability of ASBA forms easy, investors can download the forms from BSE or NSE website which bears a unique application number formulated to avoid duplication. As of August 2016, 58 banks are SCSBs under the ASBA facility. Applicants just have to fill the details at the respective SCSB and instruct banks to block the amount. The same information is then uploaded on the bidding platform by the banks.

Before 2008, ASBA was mandatory only for the non-retail investors. However, effective May 2010, all investors whether QIBs or retailers can apply for ASBA where maximum of five applications per issue can be filed from the same bank account. Only the anchor investors who make an application of minimum of 10 crores in an IPO are not allowed to apply through ASBA. The bids received are then reflected in the demand graphs of the stock exchanges. One can also easily withdraw a bid through ASBA before allotment and get the application money unblocked by respective SCSB.
[PAGE BREAK]

SHORTCOMINGS

ASBA has helped to eliminate the delays of refund process of the unallocated shares. However, ASBA comes with few shortcomings which are likely to be addressed soon.

Still not much retail, specifically the small investors’ participation in IPO is seen through ASBA. A large pool still prefers to invest through the brokers by issuing cheques.

In case of compulsory ASBA, brokers will have to obtain separate Power of Attorney for operation of bank accounts from clients, for these accounts, which would be a tedious process.

Alternatively, brokers will have to open multiple bank accounts since the current norms only allow for up to five applications per bank account per issue.

Moreover, if the investors’ banks do not fall under the SCSB list, then they will have to open a separate account in the SCSB instead of their regular brokerage accounts. To add to it not all branches of the SCSB will have the ASBA facility available with them.

Regular bank employees are made to serve clients on ASBA where they become reluctant to do this extra task. Some of the employees are not even properly trained in the related matter. Eventually, if the brokers receive applications and decide to send the same to different SCSBs, the time and transportation charges would increase and would lead to the timeline lapse as the listing time is now reduced to six days.

However, the over subscription numbers suggest that the new system of ASBA is working well. As a matter of fact, SEBI is constantly regulating and making amendments in the IPO listing mechanism as and when required. ASBA has been made compulsory for the applicants. To augment the submissions, SEBI has allowed Registrar and Share Transfer Agents (RTAs) and Depository Participants (DPs) to accept physical and online application forms.
[PAGE BREAK]

HAPHAZARD SELECTION STILL IN PRACTICE

Retail investor is the one who applies for any IPO with a capital not exceeding `2 lakhs. Retail investors are seen actively participating in IPOs in the recent years leading to over-subscription in almost all scrips. Investors mostly prefer to invest in retail category through multiple folios in the names of their family members to ensure allotment.

Earlier, before 2013 more than 67 per cent of the issues traded at a discount price and the retail investors who had submitted bids with larger lots got stuck as there were no takers and thereby those retail investors were allotted maximum shares. Regulators thereafter feared that the retail investors may not come again if they lose money in the primary markets. The launch of ASBA and other norms by SEBI that reduced the issue costs and time of the investors led to higher participation.

In the process of IPO listing, once the broker receives the applications from firms, QIBs, NIBs and retail investors, the brokers place “buy” orders and issue an order confirmation slip to the applicants. The broker can collect as much as 100 per cent of the application money from the clients and deposit the same money in an Escrow Account with the clearing house of the bank.

The weightages are already decided as per the guidelines of SEBI and thereby the percentage of the offer is allocated to the various categories of applicants. For instance, not less than 35 per cent of the offer is usually made available for allocation to the Retail Individual Bidders in the book build issue.