Sebi eases refund mode for new share applications

[N.Sukumar]

The Securities and Exchange Board of India (Sebi) today kicked off
reforms of the public offer process by putting in place an alternative
mechanism for the payment of application money for public offers and
rights issues.


Instead of the present system, where retail investors are required to
pay the entire application money upfront, the proposal approved in-
principle by the Sebi board envisages a mechanism to retain the funds
in the applicant's bank account till the allotment is finalised.

This method is expected to not only help eliminate the problems often
seen during the process of refunds but will also ensure that the
bunching of public offers does not drain the system of liquidity, as
was the case earlier this year.

The main intent of the move, piloted by Sebi Chairman C B Bhave, is to
reduce the timeframe between the closure of the public offer and the
listing.

Initially, however, both the options – either to pay the entire money
upfront or to debit the bank account when the allotment is made – will
be available as the entire system is not geared up for an immediate
change. To begin with, sources said, three or four large banks and
their branches in metros will roll out the new option.

"A beginning will be made with a few select branches from where the
new arrangement can be implemented smoothly," Bhave told Business
Standard. In the coming months, the idea is to implement the mechanism
across the country.

During the second stage of the public offer reforms programme, the
regulator wants to make it mandatory for all institutional investors
to make 100 per cent payment with the application for shares.

At present, institutional investors only pay 10 per cent of the amount
at the time of application. Since qualified institutional buyers,
which include foreign institutional investors and domestic mutual
funds, are paying only a part of the application money, an impression
of over subscription is created, which may not lead to actual price
discovery, Sebi has concluded.

Bhave said in most IPOs, 85 to 90 per cent of the applications come
from the top 50 centres in the country and a majority of them are from
western India -- mostly Mumbai and towns and cities in Gujarat.

While he did not comment on the date for rolling out the new system,
banking sources said a beginning is likely to be made in July and by
December the top 50 centres may be covered.

Banks like State Bank of India have already informed Sebi of their
willingness to implement the proposal and are, in fact, seeing a
business opportunity since they can offer overdrafts to help their
account-holders to purchase shares.

Investment bankers, however, still see difficulties in implementing
the move. "It may be fair to say that it will help smaller issues but
for the larger ones (in terms of the number of applications received),
one has to see how it will eventually pan out," said a senior
executive with one of the top domestic investment banks.

In addition, the Sebi board also decided to enhance the minimum net
worth requirement for registration as portfolio manager to Rs 2 crore
from Rs 50 lakh at present. The draft of regulations for issue and
listing of debt securities was also approved by the board.

N.Sukumar
Research Analyst