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Three Cheers for Sebi
March, 10th 2010

"In the primary issuance process, Qualified Institutional Buyers (QIBs) that currently pay only 10% margin while applying will be required to pay 100 per cent money in line with what other investors are required to do for all the issues that open on or after May 1, 2010."

With these words, Sebi Chairman CB Bhave flagged off a move that would provide a level playing field in the Indian primary market.

The primary benefit or casualty of this move depending on which or rather whose glasses one is viewing its implications from is that the days of IPOs getting oversubscribed an abnormal number of times, especially on the opening day itself may become history.

Retail investors, especially those who were lulled into a false sense  of security in the belief that QIB (over) subscription for an IPO on the opening day itself suggested its investment-worthiness could be beneficiaries to the extent that they will now not be (mis) led and will need to do their own homework before participating in an IPO.

Further, IPOs will need to be better spaced out as QIB funds which were spread thin across multiple IPOs will now gravitate towards what they perceive to be the best on offer.

The doors have also been opened for the more active use of  ASBA (which is a mechanism whereby an Application is Backed by a Blocked Amount) for applying in IPOs.

ASBA considerably reduces the paper-work by blocking the application money in the account of the applicant and that amount is debited only at the time of allotment.

Notably, 15 to 20 per cent of retail applications are already currently being routed through ASBA and with QIBs now needing to put down a 100% payment, the ASBA route will become the preferred one.

This in turn will make Sebi's other professed objective of reducing the lead time between the closing of an IPO to its Listing from around three weeks to one week a reality, sooner than it would otherwise have been possible.

The 'collateral damage' of this laudable objective which should become a reality well within the stipulated time frame of a year, will be the notorious 'Grey Market' and its operators.

That this will also ensure against the astonishing and abnormal listings of otherwise dubious IPO issuing companies will be a collateral benefit that will go a long way towards clearing the decks for a more transparent and vibrant primary market.

To sum up, Sebi has displayed great foresight in announcing this initiative which will ensure that institutional investors gravitate towards ASBA. This in turn will reduce lead time to listing and bury the vultures who fed off the long lead time.

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