In January 2008, Reliance Power concluded its blockbuster initial public offering, or IPO, with record subscription of Rs 11,500 crore. The timing could not have been better. After a heady bull run, the benchmark BSE Sensex was hovering close to its all-time high. Still, what came next was unexpected.
Shortly after the IPO closed, stock markets around the world began to collapse in the wake of the global financial crisis. Applications worth Rs 800,000 crore were riding on the Reliance Power IPO, but investors had to wait for an excruciating three weeks for the company to list and redeem their money. As market sentiment had undergone a sea change in the interim, shares of the company tanked on listing on February 7.
Although that was a drastic example of market sentiment changing overnight, it is not uncommon for investor sentiment to swing from one extreme to the other in a short span of time. As IPOs are priced to the prevailing market conditions and investors apply keeping in mind the current sentiment, any change disrupts their calculations. To overcome this problem, market regulator Securities and Exchange Board of India (Sebi) last month decided to reduce the time from closing of an IPO to listing from 13 to seven days from 2016.
"Reduction in IPO timeline will provide comfort to a lot of investors," says Sanjay Sharma, managing director (equity capital markets), Deutsche Equities. Market experts believe this long-pending reform will boost investor appetite for IPOs, and for companies, it will cut costs. "An investor puts money in an IPO today, but the ability to trade comes after two weeks. In two weeks, a lot of things can change. If the market goes down, the investor doesn't have the opportunity to exit," says Sudhir Bassi, executive director of law firm Khaitan & Co.
In many developed markets, it takes just three days to list shares from the day of closing of the public issue. Markets such as the US even have so-called "when-issued" option, where investors can start trading in shares immediately.
Sebi too plans to eventually bringing down the IPO time to three days. This would make investing in an IPO similar to buying shares from the secondary market.
But there are logistical issues that need to be fixed before the timeline can be shortened further. As the entire IPO application system isn't electronic, distribution of IPO forms and collecting and processing cheques take a lot of time at present. Sebi plans to do way with cheque payments altogether and move to an electronic process, dubbed as e-IPO, to speed up listing. The e-IPO will also mean printing of application forms and offer documents will reduce significantly, which will help issuers save significant costs.
"The move to halve the IPO timeline is an interim measure. Eventually, the plan is to make the process similar to what happens in an offer for sale. Sebi plans to use the nationwide network of brokers for IPOs, instead of the syndicate arrangements used at present," says Girish Nadkarni, managing director, Motilal Oswal Investment Banking.
Sebi's latest move has been made possible by its decision to make Applications Supported by Blocked Amount, or ASBA, compulsory for all categories of investors from January 2016. Under ASBA, the application amount remains blocked in the investor's bank account till the time of allotment of shares, and it is now mandatory for all investors except retail (those investing less than Rs 2 lakh). According to data, almost 99 per cent of IPO applications are now done through ASBA.
"Once we are comfortable that the system is working well with T (transaction or IPO closing day) +6, our attempt will be to reduce the time further. We can't give a timeline right now as to what is our ultimate goal, but our desire is to reduce it even further," says Sebi Chairman UK Sinha.