Mumbai, March 20: There are a number of hurdles to the proposal of allowing investors to buy shares in an Initial Public Offering (IPO) through brokers online. The risk of default has to be borne by the broker, order quantity might not be economical enough for the broker to execute, while rural investors, not having access to broker terminals may not be able to apply. The BSE has mooted this proposal of buying into shares of IPOs as a secondary market transaction which is being considered by the Securities and Exchange Board of India. The National Stock Exchange is ready with the necessary infrastructure to start the new system as it has already installed it for book-building process. The way it will work is like this: as in the secondary market, investors will place buy orders with their brokers for shares. On receiving the order, the broker will send the investors' applications through the terminals to the company or its registrar. The applicant will pay for the shares only on allotment. According to Nimesh Shah, of VFC Securities Pvt. Ltd. "Though the concept looks sound, there are some practical problems in this system. Orders for small quantities might not be economical and therefore will not be executed by the brokers. The ultimate responsibility for default will lie with the broker."
Brokers will not be willing to take the risk, unless there is some margin money provision, which could be some percentage of the application amount, he explained. It would also preclude rural investors from subscription.Apart from urban investors, big brokers with many sub-brokers will benefit from this arrangement, as they can get additional business for themselves.Vinod Vasa of Creative Global brokerage firm said that broker risk can be obviated by having 30 per cent of the application amount deposited in an escrow account.
On the other hand, the advantages of the new system include faster receipt of shares, no refund problems and no blocking of funds. At present, the number of days from application to allotment is minimum 30 days, while under the new system, the process could be completed within a week of the issue closure. Since the investor pays up only on allotment, there is no question of refunds or funds being blocked up. The option for the mode of holding shares either in demat or physical will continue. According to industry circles, this method is expected to help curb excessive speculation, since the entire process is online and to some extent transparent, while the price discovery process is expected to be better (as in the case of a book-built issue).
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