IPOs were the talk of the town in the last financial year with a total of 52 Indian corporates raising an all-time high of Rs. 1.11 lakh crore in FY 2021-22. But as far as the applications and demand for the IPOs are concerned there has been a spike in rejected applications. Market participants are applying for the IPO but aren’t ready to put the money on the table. The applications are getting rejected giving rise to claims of bogus applications with an intent to spike up the demand for the IPO.
Bogus applications in LIC, Delhivery, Prudent Corporate Advisory, and Venus Pipes and Tubes range between 30% and 70%, creating an impression of high demand. More on this here.
To set the context clear for the different types of IPO applications, there are prominently 3 ways to apply for an IPO;
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Member ASBA: Stockbroker accepts a physical form and bids on the exchange. The physical form is then sent to the bank where the bank confirms the block if money is available in the client’s account. If one wants to pump up the HNI book, they could submit an IPO application using this route without any money in the account.
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Bank ASBA: The investor places their IPO application directly on their bank’s portal or submits the physical form directly to the bank. The bank checks the fund availability and then places the bid on the exchange’s platform. Since the funds are checked first, there’s no application spoofing involved.
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UPI ASBA: The client’s bid is placed on the exchange even if the client has inadequate funds or changes their intent and rejects the UPI mandate. Although, in terms of number of applications, this will lead to the most rejections, but one investor or a group of investors cannot use the UPI ASBA route to show inflated demand since the bid amount is capped at Rs. 5 lacs.
In light of this SEBI has put out a circular tweaking IPO bidding norms.
According to this circular:
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The ASBA applications in Public Issues will be processed only after the application amount is blocked in the investor’s bank accounts.
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Stock Exchanges shall accept the ASBA applications in their electronic book building platform only with a mandatory confirmation on the application monies blocked.
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The circular will be applicable for all categories of investors; Retail, QIB, NII and other reserved categories and also for all modes through which the applications are processed.
These changes will be applicable for public issues opening on or after September 01, 2022.
Note: There are a few more updates awaited in the UPI-based application process. We shall update the post accordingly.
Update: NPCI has proposed a change in the UPI ASBA process to block money before a broker submits the application to the exchange. This will require major system changes for brokers, exchanges, and banks. We shall update once there are more clarifications from the regulators.