SEBI has changed the payment process for IPOs and this will benefit individual investors
There is some good news for the investors. The market regulator, Securities and Exchange Board of India (SEBI), has changed the payment process for subscribing to initial public offers (IPO) and rights issues. Under the new process, the application money will remain in the bank account of the applicant till allotment is finalized.
Currently, the money is debited from the bank account, and based on the number of shares allotted, the excess money is returned. According to SEBI, the new system would eliminate the refund process. The modalities of the entire process will be worked out separately.
The SEBI Board has approved, in principle, the concept of making a lien on the bank account an alternative mode of payment in public/rights issues. This means the money earmarked for the IPO will not be used for any other payment obligation during that period. At the same time, the applicant will get the interest payable on the amount. This would also reduce the burden on registrars and merchant bankers. But bankers to the issue can no longer enjoy the floating interest, said officials associated with the IPO process. Most important of all, investors would not have to wait for their refund money. It also ensures that a liquidity crisis such as that in January 2008 does not occur again. At that time, many investors were unable to buy scripts which were at attractive lows, as their money was locked up in a few big IPOs, and they could not meet their margin money requirements.
In the case of mega IPOs, which are oversubscribed many times, large amounts of investor funds is blocked for days. Investors don't need to wait for refund of their application money, if they are not allotted shares. Currently, retail investors have to make the full payment on application for shares, which are later refunded to the extent the shares are not allotted, which would normally take three weeks to a month. SEBI is planning to introduce a value-paid instrument, which would help banks freeze the application money till the allotment is made.
The SEBI Board also increased the minimum net worth requirement for registration as a portfolio manager to Rs 2 crores from Rs 50 lakhs. It said existing portfolio managers with lower net worth will have to increase it to at least Rs 1 crore within six months, and to the new prescribed limit in the next six months. SEBI said portfolio managers will not be allowed to pool the resources of clients like mutual funds and must keep assets of each client separately. Portfolio managers working on pooled basis have been given six months to convert their operations to individual basis.
At the same time, new IPO application forms are being designed. The new IPO application forms would avoid manual intervention. SEBI's Primary Market Advisory Committee (PMAC) has given an in principle nod for initiating steps to ensure 'no manual intervention' in the primary market issuance process. PMAC has endorsed the suggestions of the Group on Review of Issue Process (GRIP) on this matter. GRIP had recommended modified application forms that can be submitted physically as well as electronically. These measures will enable faster and more transparent processing of application forms, leading to a reduction in the time gap between closure of an IPO and its listing.
