Compulsory Asba may hit retail participation in IPOs

Brokers have written to the Securities and Exchange Board of India (Sebi) highlighting the difficulties 2-in-1 trading account holders might face in using the Application Supported by Blocked Amount (Asba) to invest in upcoming initial public offerings (IPOs).

Asba is an online payment facility provided by some banks wherein the application money is blocked and gets debited only after the IPO allotment is made. Sebi has made the facility mandatory for all categories of investors applying for a public issue from January 1.

According to experts, the bulk of retail applications in recent IPOs come in through the non-Asba route, as a large number of investors prefer cheque-based applications despite the convenience of Asba.

“There is the possibility of a large number of investors investing through their brokers either by way of cheque or an online application getting affected. A little more thought is required before making the Asba mode compulsory,” said Prasanth Prabhakaran, head, retail broking, IIFL.

Investors invest in the stock market either through 3-in-1 or 2-in-1 accounts. In case of the former, which are operated by bank brokers, the stock broker has the power of attorney (PoA) to operate both the bank and the demat accounts. For the latter, brokers have the PoA for demat accounts, but not bank accounts.

Here’s how a typical IPO application through a 2-in-1 account is processed. The broker first gets the receipt of instruction from the client, which is then verified by the broker. The system, then, generates an IPO application form, which is printed and signed by the stock broker. In the fourth step, a cheque or demand draft/bankers cheque is issued by the broker from the client bank account after debiting the trading account of the client.

With compulsory Asba kicking in, the fourth step will be replaced by the Asba process. This would mean brokers will have to obtain separate PoA for operation of bank accounts from clients for these accounts, which would be tedious. 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.

“Both these options are unviable. Since only banks have the facility to block funds in a client’s account, clients will have to open a 3-in-1 account and then apply for an IPO,” said a broker who did not want to be named.

Brokers also believe several investors might be left out from participating in future IPOs due to the limited reach of Asba, especially in far flung areas. “Non availability of branches authorised to accept Asba forms and limited trained persons available at the bank branches who understand the securities business remain constraints,” said the note. While these problems don’t exist for clients using online banking, their numbers remain few, noted the brokers.

At present, only 40-odd banks are designated to accept Asba applications.