Ipos Without Tears

India is blessed with a whole slew of competent, professional, business-savvy, dedicated, disciplined individuals with brilliant ideas. Unfortunately, the country is also cursed with bureaucrats entrusted with the economic welfare of the state, who prefer to stay with archaic technology and show armchair interest in anything that spells change.

Fortunately, the Securities and Exchange Board of India (Sebi) has done a signal service to the country by playing a vital role in introducing a whole slew of premium products and services.

The other day, while talking to C B Bhave, managing director of the National Securities Depository Limited (NSDL), I found that he had a straightforward and useful idea. Sebi has certainly opened up new frontiers for the primary market. I hope that it adds one more frontier to reduce wastage of time, effort and paper.

 

Now, Bhave's idea.

In a primary issue investors subscribe by applying for the desired number of shares along with an instrument authorising payment into the issuer company.

The issuer company encashes these instruments to ensure that the amount supposed to have been paid along with the application is actually realised. Stockinvest is an exception. The issuer then considers the valid applications (where payment was actually realised) as eligible for consideration for allotment.

Successful allottees (in the case of oversubscription) are then issued shares and a part refund if their applications have been partly accepted. The unsuccessful ones are given a full refund. If the successful allottees had applied through Stockinvest, the stockinvest is cashed. Subsequently allotment and part refund is processed the same way. Stockinvests are returned to unsuccessful allottees.

The issuers have no choice except to cash the instruments, otherwise they have no way of assuring themselves that they have received or would receive the consideration for issue of shares.

If an issue is oversubscribed many times (100 times is quite common these days) it would mean that most of the work is unnecessary. Hundred times the issue amount is collected and 99 times is refunded. Thousands of instruments are processed in the clearing system, first by way of cheques and drafts issued by applicants and next by way of refund warrants.

Sebi can provide an effective solution to the excessive processing work in the public issue market by allowing investors to subscribe in a new way.

The investor can apply for a primary issue through a bank (which is prepared to provide this facility) if he has an account with that bank. The bank will block the amount of money which the investor is required to pay with the application in the investor's account (not actually debit the investor's account). The bank will forward all such applications to the issuer along with a schedule indicating the name of the applicant and the amount blocked for each applicant.

The issuer will treat all such applications as valid (i.e. as if payment has been realised). When the allotment is completed the issuer will advise the bank the investor-wise list of money to be paid to the issuer and the investor-wise refund amounts. The bank will make the money available in two working days. If there is a delay, the bank will be liable to pay interest to the issuer. The bank will get the refund by simply de-blocking the amounts in each account equivalent to the refund amount. It will also debit the accounts of successful allottees to the extent indicated, in order to make a payment to the issuer.

This facility could have been made possible even in a non-computerised environment. Now that most of the banks have embarked on a computerisation drive and many of them have connected main metropolitan centres to their head offices this facility has come within the reach.

The advantages of the system are:

* Money will not move out of investor accounts unless they are successful allottees.

* Instead of thousands of cheques and drafts only one payment per bank to the issuer will be processed in the clearing system.

* Processing refund orders will be totally eliminated to the extent of the applications made under this system.

* A huge reconciliation process at registrars end will be reduced alloing for quicker allotment.

* Issuers will save substantially on not having to print refund orders.

* Theft of refund orders will become a non-issue.

The scheme should be in addition to the existing system of subscribing through cheques/ drafts etc. This will allow the scheme to grow with growing market acceptance.

Entities that look forward to the benefits from the collection of excess funds from oversubscriptions may protest in different ways. We need not worry about them. After all, it's the the investors will drive the market towards this scheme.