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> Stopping the IPO gravy train |
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Stopping the IPO gravy train
posted by
Vivek Sharma
14 May 2008, 22:30
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labels: Indian stock markets, Investing
Back in the nineties, heavily oversubscribed IPO’s were a highly profitable proposition for issuers. From application to allotment or refunds, the entire IPO process took a very long time and investors had to pay the full amount upfront. The entire application money went to the issuer which earned interest until refunded to investors. Given the large sums of money involved in large IPO’s, interest income earned by issuers were also sizeable and often paid off the entire issue expenses.
This went on for many years before SEBI woke up and introduced the concept of escrow accounts. Under this system, the money left the investors’ accounts on application but reached the issuer’s account only after allotment. The excess application money after adjusting for allotment was promptly returned to investors. Issuers no longer received any interest on the application money and this was a definite improvement over the earlier system.
But, the banks were enjoying access to free funds which came to be known as free float. Aggressive issuers soon demanded a share of the booty. Since banks could not pay any money directly to the issuers, they subsidised the issue expenses. In other words, issuers continued to benefit.
With its latest directive, SEBI has closed this last window of opportunity for issuers. From now on, the application money will not leave the investors’ accounts until allotment. There will be a lien equivalent to the application amount on the investors’ accounts, from application to allotment. By eliminating the refund process, the new system will remove the biggest source of investor complaints.
Full credit to the new SEBI chairman for bringing about this significant change in the IPO process.
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