Securities and Exchange board of India (Sebi) is in the mood to make IPO transactions more transparent and investor-friendly. In their attempt to achieve this much-needed market boost, they are planning to re-launch the 1992 Stockinvest system. However, now with modern technologies at their disposal, the regulatory body will make this system electronic. Also, having seen the previous drawbacks, this time round, the system should be far more viable and hassle-free. Based on investor reactions and acceptability, this new system will find its place in the market.
Going back in time
The Companies Act 1956, section 69, sub-section 1 states that the share application money can be paid either in cash or by cheque or by any other instrument. Keeping this in mind, Sebi decide to introduce the Stockinvest scheme. This system, created by the State Bank of India, provided for the investor to indicate the name of the issuer along with the number and amount of shares and debentures applied for. A space for the authorised signatory of the company to indicate the entitlement to shares and debentures applied for and a statement from the bank expressing that it is guaranteed for payment at par on all branches also formed a part of this instrument.
The issuing bank gave the Stockinvests duly signed and also marked the date to the investor. Simultaneously, the bank would mark a lien on the investors account to the extent of the Stockinvests issued.
The investor, while applying for public issues, will enclose the Stockinvest forms duly filled in along with the application forms and send them to the collecting bank as he normally does in the case of cash, cheques, and drafts under the then existing system. Once the basis of allotment is decided, the company would encash the Stockinvest instrument in respect of those applicants who are successful allotted and partially of those who are partially successful. The unsuccessful applicant?s Stockinvest instruments would be returned to the investor without enchasing them. The successful or partially successful applicant?s instruments would, after enchasing, be deposited in a separate bank account, where the cash and other monies received from other investors are deposited.
This was informally known as the account payee system, and the biggest complaint faced by the investors with this new tool was late or non-payment of the unused money in the Stockinvest instrument. In order to combat these constant problems, the Sebi changed the rules and guidelines consistently over the years. The registrar got heavily involved in this procedure but this too seemed to have little impact, as the companies continued to delay investors? payments, keeping their money blocked. This hindered their ability to freely invest in other companies, causing major liquidity problems within the market. On November 5, 2003, RBI issued a notice stating it has observed that the use of Stockinvests as a mode of payment for application of shares and debentures in the primary market has declined substantially. Moreover, Sebi has taken several measures for bringing down the allotment period under primary issues, which have considerably reduced hardships caused to the investors on account of delay in the allotment process. In view of these reasons, it has been decided that the scheme need not continue any longer. Accordingly, the Stockinvest scheme may be treated as withdrawn with immediate effect. Thus ended the erstwhile Stockinvest scheme in India.
Resurrection
Come 2008, the markets don?t face too many problems as far as repayment of money to investors who have not been allotted shares go. However, the time currently taken by IPOs to complete the allocation and refund procedures is 21 days. Most IPOs also require retail investors to pay the entire subscription money on application, whereas the qualified institutional bidders and financial institutions pay only 10%. This means that a good company usually holds multiple times the issue amount with them for 21 days, earning interest off peoples money, whom might not even be allotted shares! All this while an investor?s money is locked up and he loses interest on the same as well. While 21 days may not seem that big a deal, the recent Reliance Power IPO was over subscribed by a whopping 73 times. The company refunded around Rs 1 lakh crore after allotments. This money trapped in the system was not available for investors for almost a month and contributed to the liquidity crunch that the markets faced. Hoping to address this issue, the Sebi has decided to re-introduce a new and improved version of the Stockinvest system.
The new electronic Stockinvest system as proposed by the Sebi will allow investors to subscribe for shares in a public issue and yet hold on to their application money till the shares have been allotted. Sebi chairman CB Bhave, while speaking to an IPO conclave, said that the market regulatory body is trying to develop a system where the money is debited from a person?s bank account only on allocation of the shares.
?It is our belief that with the available banking technology, it is possible to earmark the amounts in an investor?s account itself and not have the money transferred,? says Bhave. Not keeping retail investors funds blocked, by bringing changes in the initial public offering process is our focus.
Addressing the earlier refund problems that this instrument faced, this time round in the electronic version of the scheme there will be no question of repayment. The investors? account will have a freeze on it for the amount subscribed and this freeze would be removed once the allotment process is completed. Bhave added that banks will play a very crucial role because they will need to be able to provide this facility. ?I am sure there will be competition among banks.?
With the market situation not looking very promising, moves like this should go a long way in winning investors? confidence back. With plans of shortening the IPO process time to 7 days, and other welcome plans in the pipeline, looks like another new age of technological trading is knocking at our doors.