Back in the early 1990s the entire IPO process used to be complicated and intimidating. You would apply for an IPO in a fixed price issue by issuing a cheque to the bankers to the issue. It would take nearly 3 months to be intimated by post whether you have got an allotment of shares or not. Your application money will be locked in till that period and you would not be earning any interest on that money. From that kind of a chaotic scenario, the IPO markets have come a long way. Prices are discovered through book building, SEBI has tightened IPO norms substantially, allotment process is completed in a week’s time and disclosures standards have improved in a big way. But a big positive shift in the IPO process was the introduction of ASBA. The Application Supported by Blocked Amounts (ASBA) is a method wherein your bank account only gets blocked to the extent of your application amount but does not get debited. The issuer, in this case, is not able to enjoy the interest on the float for the interim period and is largely positive for the small and medium sized investors.
So, what exactly is ASBA all about?
ASBA is not only more transparent and simple but also ensures that your funds are not unnecessarily used up by the IPO issuer. The ASBA amount gets blocked but you will continue to earn interest from the bank and the actual debit happens only on the date of the actual date of allotment. The blocked amount to the extent of non-allotment is automatically released in your bank account and there is no hold on those funds any longer. More than 20 years back, the Indian IPO market saw a similar product in the form of StockInvest where the debit would happen only on allotment. However, this system was misused through third-party StockInvest instruments and subsequently the system had to be scrapped in entirety. However, since the bank account already goes through rigorous KYC and identity checks, ASBA is a lot safer as a means of applying for IPOs.
Understanding the process of ASBA while applying for IPOs…
When you are applying for an IPO via the ASBA, the following things need to be remembered…
- ASBA facility can be availed by you irrespective of whether you are using the online IPO application facility or the offline IPO application facility. Of course, if you are opting for ASBA offline, then ensure that your bank account number, account holder name, demat account number and bank IFSC code are entered properly. Wrong data can lead to rejection of the application.
- In case you have an online trading account and an online demat account with your broker then the ASBA process becomes a lot simpler. Typically, brokers who are also bankers (like ICICI, HDFC, and Kotak) then the broker may insist that the ASBA application should only come in through the 3-in-1 account for ease of transacting.
- Remember, once your ASBA application is accepted then the funds are blocked in your bank account and marked for the specific application. If you have issued cheques to third parties and do not have sufficient balance outside of the blocked amount, then your cheques are bound to be dishonoured.
- An ASBA application can be withdrawn at any time before the closure of the issue. Every lead manager of an IPO announces the cut-off time on the last day of the issue before which the ASBA application can be withdrawn. The key thing to remember is that only online ASBA applications can be cancelled. Once you seek cancellation you need to approach the Registrar & Transfer Agent (RTA) for the IPO withdrawal with the cancellation acknowledgement copy. Only after the RTA withdraws the application you can get your ASBA funds unblocked. You can also revise your bid at any time before the cut-off for the closure of the issue.
- ASBA facility is only available in case of book-built issues and not in case of fixed-price issues. Of course, nowadays the fixed prices issues are almost non-existent and most of the IPOs prefer the book building route where the price is discovered through bidding. Your ASBA application funds are blocked based on the indicative price but the actual debit on allotment is done based on the discovered price.
- Under ASBA, you are entitled to put in up to 3 bids. These bids will be matched based on your Income Tax PAN. If you put in more than 3 bids then all bids are liable to be rejected. Remember, multiple bids are allowed but multiple applications are not. In case of multiple applications both the applications are liable to be rejected under ASBA.
Why ASBA is an important development in the Indian IPO landscape…
The ASBA application process was first introduced in 2008 but the facility was made mandatory by SEBI only from 2016 onwards. Now, all book built issues are required to offer the ASBA facility to the IPO applicants. ASBA has gone a long way in empowering the small and medium sized investors in India. The entire ASBA process favours the retail investor in India as they gets more power and control over the IPO process. That is the big takeaway from ASBA!