SEBI cracks the whip on bogus IPO applications

Market regulator SEBI (Securities and Exchange Board of India), in a swift action following the Fortune India report 'Indian IPOs inundated with bogus applications', came up with a fresh circular, saying only those applications will be uploaded on exchanges websites and counted as valid in which the required application monies are blocked in the investor’s bank accounts.

The market regulator has asked all intermediaries and market institutions to ensure adequate arrangement in three months. The SEBI circular will be applicable for public issues opening on or after September 01, 2022.

"The ASBA applications in public issues shall be processed only after the application monies are blocked in the investor’s bank accounts. Accordingly, all intermediaries/market infrastructure institutions are advised to ensure that appropriate systemic and procedural arrangements are made within three months from the date of issuance of this circular," says the SEBI circular.

Notably, as reported by Fortune India, four IPOs, LIC, Delhivery, Prudent Corporate Advisory Services, and Venus Pipes and Tubes, which hit the stock market in the past month -- all recorded a suspiciously high percentage of rejected application forms (30% to 70%) from the retail category.

The market regulator says it reviewed the processing of ASBA applications in the public issues by market intermediaries and SCSBs. The current move has been taken to streamline the bidding process, and to ensure the orderly development of the securities market, says SEBI.

The SEBI circular says the stock exchanges will accept the ASBA applications in their electronic book building platform only with a mandatory confirmation on the application monies blocked. Its 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.

SEBI has asked all stakeholders to take necessary steps to ensure compliance and asked merchant bankers to coordinate with all stakeholders.

SEBI introduced the use of the Unified Payment Interface (UPI) as an additional payment mechanism with ASBA for retail investors in November 2018. It was mandated w.e.f July 01, 2019, for applications by retail investors submitted through intermediaries.

Bogus applications issue

The data on rejected applications, out of the total, emerges before the IPO listing when all companies must issue a basis of allotment advertisement.

Thus, the astounding gap between the numbers of genuine applications versus the applications received gets revealed only after the issue closes. Till that time, one can only see the number of applications received in each category, as displayed on the system of the exchanges.

The concern is not necessarily the rejections or the high percentage of rejections, per se. The real issue is that even the rejected applications appear in the system as genuine applications till the mandated advertisement is published after the closure of an IPO.

Rejected applications inflate the number of subscribers, thus bolstering the perceived popularity of an IPO. This creates an image of an investment-worthy IPO, even when rational analysis of other factors may suggest otherwise. This entire gambit negatively impacts only one cohort in the stock market, that is, the retail investors.