IPO refunds are history, new rule in

Sub Heading : Sebi says investors can apply without having to transfer cash

Author : N Sundaresha Subramanian/DNA

Many investor complaints can be avoided by making some systemic changes, the chairman of the Securities and Exchange Board of India, C B Bhave, had said two weeks ago.

On Tuesday, the Sebi board he chairs made one that would change the IPO refund process —- a Gangotri or perennial source of investor complaints —- by providing for an electronic lien on investors' bank accounts.

What this means is, the retail investor can participate in the public or rights issue, without the application money actually leaving his bank account.

The bank will mark a lien on the customer's account to ensure that the requisite sum is locked in until the allotment process is finalised.

The money will be transferred to the company only when the actual allotment takes place.

In case the allotment does not happen, the money gets automatically unlocked and is at the investor's disposal.

"The board approved, in principle, the concept of marking lien on bank account as an alternative mode of payment in public rights issues. The concept will enable the application money to remain in the bank account of the applicant till such time the allotment is finalised and thus eliminate the refund process," the market watchdog said in a release.

Currently, the retail investor has to pay the application money in advance.

Since there is a mandatory 21-day gap between subscription and allotment, the money stayed with the bankers as a "float".

The refund process took a further two weeks.

So, the investor was losing interest for these 36 days and the banks were enjoying the float.

Let alone the loss of interest, often even the capital was lost. In case of oversubscribed issues, not all investors get allotment of shares. Some get partial allotment, others nothing at all. These applicants are refunded through refund orders.

Existing norms allow 15 days time for the registry to send refund orders to be despatched. But after every IPO, there are complaints of non-receipt of refunds.

Registrars to the issue who are in-charge of the allotment process and sending refund orders feel investors also contribute to the faulty refunds as they give incomplete or wrong addresses in their applications.

M V Ramnarayan of Intime Spectrum Registry says, "Everybody adds their bit to the problem." But he feels the new system will be a big relief to all parties involved.

"The electronic lien proposed will reduce lot of dredging work, which the registrars were doing otherwise. It will make the IPO process more efficient."

Investment bankers say the move will benefit the investors.

Sudhir Dash, director, Motilal Oswal Investment Advisors, says, "Banks may have to do some IT work to streamline the process. Also, they may not like it as the bankers to the issue, they will lose out on the float they used to enjoy. This move makes the tem more efficient and helps the investor."

n_subramanian@dnaindia.net