Rules stump rights issue subscribers

Some non-retail shareholders saw applications rejected after cheques got encashed

The mandatory Asba (applications supported by blocked amounts) rule for rights issue had a few wealthy investors stumped. Unaware of the new rules, some investors in the twin rights issues of Netwo-rk 18 and TV18 Broadcast put in applications by cheques, only to face rejections later.

One such application came from Shri Parasram Holdings, which put in an application of Rs 45 lakh through cheque for holdings in TV18 Broadcast. The cheque was encashed and the money debited from the bank account. Later, the application was rejected by the registrar for being a non-Asba application of more than Rs 2 lakh.

According to a senior official at ICICI Securities, the lead manager for the rights issues of both TV18 and Network18, a few investors and even promoters who didn't have the knowledge of the new rules, had their applications rejected for putting in big-ticket applications through cheques. “The TV18 and Network18 rights issue, being the first major rights issue after Asba was made compulsory, caught a lot of investors unaware,” he said.

Last year, the Securities and Exchange Board of India (Sebi) made Asba compulsory for all non-retail investors in public and rights issues. In a circular dated April 29, 2011, Sebi had said, “All applicants who are qualified institutional bidders (QIBs), non-institutional investors or are other equity shareholders applying in this issue for equity shares for an amount exceeding Rs 200,000, shall mandatorily make use of Asba facility.”

Asba is a facility where funds remain in an applicant's bank account till the time shares are allotted to him or it in a public offer or rights issue.

What probably led to the confusion was the rule that 'renounced applications', even if more than Rs 2 lakh, have to be made through cheque. Renouncement of application is the transfer of rights entitlement by a shareholder to other investors who might not be a shareholder of the company.

The aforesaid broker even complained to Sebi, alleging the letter of offer of the TV18 rights issue was misleading as it didn't clearly state that all non-retail applications for over Rs 2 lakh had to come through Asba. He also questioned the lead manager and the banker as to why the cheque was cleared and bank account debited if the application was not proper in the first place.

The lead manager, however, said the bank was only a collection centre and had no facility to determine whether the application was proper or not. All cheques get encashed to make sure the application is genuine.

“Compulsory Asba for IPOs is very straightforward, while for rights issues it is slightly more complicated as renounced applications of more than Rs 2 lakh can be made through cheques and self applications have to come through Asba,” he said.

“We would have been happy to accept all applications. But according to the new rule, certain applications had to be rejected. There is nothing much that could have been done about it,” the investment banker added.

"Network18 and TV18 have provided adequate disclosures, as mandated by Sebi under the heading ‘Grounds for Technical Rejection for non-Asba Investors’ on page 278 in the Letter of Offer of Network18 and on page 86 in the Abridged Letter of Offer of Network 18 and page 337 in the Letter of Offer of TV18 and on Page 77 in the Abridged Letter of Offer of TV18, which state that applications made by (1) QIBs or (2) non-institutional investors or (3) investors applying in the issue for equity shares for an amount exceeding Rs 2,00,000, not through Asba process are liable to be rejected," a spokesperson for Network18 said in an emailed response.