From New Year, stock marker regulator SEBI has made it compulsory for retail investors applying to initial public offers (IPOs) to take the ASBA — Applications Supported by Blocked Amount — route. While investment bankers were worried that this would trigger a drop in the retail response to IPOs, this doesn’t seem to have happened so far with recent IPOs such as TeamLease Services and Quick Heal Technologies seeing runaway retail response.

What is it?

ASBA is a method of applying for IPOs wherein your application authorises the bank to ‘hold’ the subscription amount on your behalf until you receive allotments of shares (or refunds). The subscription amount is blocked as soon as you apply and you cannot use the funds for any other purpose while your application is in process. But the key advantage of ASBA is that it allows you to earn an interest on the subscription amount, even as you bid in IPOs.

To use ASBA, you fill in the designated IPO application form and submit it to any self certified syndicate bank (SCSB) through any of its branches. The application can be either in online or offline mode.

Why is it important?

Until now, a significant number of retail investors used to apply for IPOs or rights offers using physical application forms that were accompanied by drafts or cheques. This resulted in the funds getting locked up for several days until the IPO allotment process was concluded. Cheques also went missing at times.

In heavily over-subscribed offers, the opportunity cost of committing your money and waiting for a refund can be quite high. ASBA completely eliminates such costs.

With all retail applications migrated to ASBA, SEBI has also been able to crunch the time period between an offer, the processing of applications and the eventual listing of the stock, to just six days. This helps investors secure quick refunds from one IPO (and maybe redeploy the same funds in another!) in heavily over subscribed issues. ASBA also offers a built in mechanism to withdraw your bids, after you put them in.

Why should I care?

ASBA can greatly reduce the opportunity cost and uncertainty associated with applying to IPOs. As IPOs typically tend to be bunched up in bull markets, ASBA also allows you to jump quickly from one offer to another without waiting for your bids to be refunded, banked and cleared by the banker to each issue.

But retail investors have encountered some practical problems with using ASBA. For one, the compulsory ASBA requirement means that you can now apply to IPOs only through designated banks that offer this facility which restricts your options.

Two, if you don’t own a three-in-one trading account which seamlessly links your bank, broking and demat accounts, the ASBA process can be subject to delay and you may have to authorise your broker to deal with your bank. Three, many see the limit of five applications per account for an ASBA transaction as a constraint too.

The bottom line

There are teething troubles. But by allowing you to bid for IPOs without losing out on interest, ASBA allows you to have your cake and eat it too.

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