Thursday, October 7, 2010

Public Offers made Public - IV

After introducing Public Offers in the first part, discussing some regulatory changes in primary markets in the second part, pros and cons of the 25% listing norms in the the third part, the fourth and the final part will focus on ASBA, another revolutionary change by SEBI.

ASBA or Application Supported by Blocked Amount is a new method introduced by SEBI for making investments in IPOs, Mutual Funds and NFOs. SEBI has tied up with self-certified syndicate banks which shall provide this facility.

Before and After ASBA: 
  • In the earlier process the investor was required to pay the amount when he/she decided to invest in the IPO (once the issue was open). The company would then inform whether shares have been allotted to the investor or not after a certain time period (in most cases it was a month). If not issued the money would be refunded and that would take few more days. In the whole process the investor loses out on the interest on the money till the time one is allotted the shares. 
  • With ASBA implemented, the amount remains in the user’s bank account and only when shares are allotted shall the money be debited from the account, thereby earning some interest for the investor. 

Journey of ASBA till date: 

ASBA was introduced by SEBI from 1 August 2008 as an alternate payment mechanism for IPOs where price discovery has been trough the book building process.
  • Phase I: Facility provided to retail individual investors subject to the condition that bidding for IPOs be done only at the cut-off price with no revision facility and that there shall not more than one bid. ASBA was made mandatory for Rights Issues on 20th August 2009. 
  • Phase II: ASBA facility was extended to HNIs and Corporate Investors on 1st January 2010. 
  • Phase III: Facility extended to QIBs with restrictions on FIIs. From 1st May 2010 FIIs will have to factor in currency risks while their amount is blocked in the amount for investment in IPOs. FIIS were earlier depositing only 10% of the investment amount but with this new rule the entire amount has to be paid upfront and any currency risk (upside or downside) will have to be borne by them. FIIs being big ticket investors were given this exemption however there were chances of misuse wherein the FIIs can bid aggressively in the first few days thereby attracting huge retail subscription and then pull out before the allotments. 
Advantages and Disadvantages of ASBA:
  • As mentioned previously ASBA is a boon for all investors keeping in mind the interest earned in the blocked amount which till now was missing. 
  • ASBA has helped to do away with the concept of ‘refund’ of invested amount in case shares are not allotted. 
  • As any IPO can be listed only when all refunds have been made, ASBA has shortened the time period of IPOs from issue to launch. 
  • Greater participation can be sought from retail investors because of the convenience provided by this mechanism. 
However ASBA has its own share of problems:
  • Investors 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. 
  • Bidders are not permitted to revise their bid. 
  • ASBA till now has not been publicized aggressively in the smaller cities and towns. 
  • Moreover forms are not readily available with the banks and banks do not get as much commission as the brokers get, due to which they are not interested in promoting it. Operational hassles in the newly implemented system make the matter worse. 
According to Prime Database, on an average 13.35% of the amount raised through retail investments was through the ASBA route. In 2010 the range has been no better (6.5 – 28%) and 24 public issues and 10 rights issues have used the ASBA facility compared to 23 and 19 respectively in 2009. 

Hopefully the series was a value add to all the readers. Do send in your feedbacks. 

(This article has been taken from the report titled “Analysis of Recent Trends in Public Offers in the Indian Context (Legal and Financial aspects)” prepared by Rigved Mitra and Saket Saurabh under the guidance of Prof. V.K.Unni)


  1. "According to Prime Database, on an average 13.35% of the amount raised through retail investments was through the ASBA route." ...
    Is ASBA not compulsory for all IPOs? Or does it depend on whether the syndicate bank supports ASBA?

  2. Sorry for a late reply Priyesh,
    So far all banks don't provide this facility.
    Even awareness abt ASBA among retail investors is low.
    Add to that certain restrictions (mentioned as problems in the blog)might be hampering its full fledged acceptability.

    You can avail of ASBA only to subscribe to book-built public issues and a select few rights issues. So ASBA not compulsory for all IPOs.

  3. I don't think ASBA can be made compulsory for any IPO as it is, otherwise how will the cut-off price be decided for the IPO ? Effectively, there won't be any bidding at all.

  4. Hey AudGuy, can you elaborate a bit on why you feel ASBA won't allow for bidding in an IPO?

  5. Sure, my concern is that because for using ASBA every such investor HAS to buy at cut-off price, then if ASBA is made compulsory how will the cut-off price itself be decided (because now EVERY investor is opting for the cut-off price and no one is bidding). ASBA is probably more useful for those who don't want to bid and instead are ready to pay the cut-off price.

  6. Hey AG you have made a very valid point and in fact, SEBI should look into it (say by allowing revising of bids or more than one bid) so that ASBA can be more popular amongst the retail investors. As you would agree that ASBA does benefit the investors. In fact that could be the reason why SEBI allows it in book built issue as band is pre-decided.
    Thanks for a very value adding and meaningful comment. Looking forward to hearing more from you.