Applications supported by blocked amount help investors in IPOs and NFOs to earn interest till shares or units are allotted.

Investors in initial public offerings (IPOs) of companies are often confused. While it makes great sense to enter a company when it is being listed, there is little historical evidence about the company’s past. Then, there is always the question of how many shares will one be allotted.

In the past, there used to be another issue. The funds used to be locked-up till the company allotted the shares. That is, investors needed to send a cheque, along with the application. The company, on its part, would return the money (the remaining amount if the investor does not get the entire allotment) only after 20 days to a month.

The Securities and Exchange Board of India (Sebi) in September, 2008 resolved this issue by introducing the applications supported by blocked amount (Asba) mechanism.

Under this mechanism, the investor needs to keep the amount blocked in his/her bank account till the shares are allotted. The investor, therefore, does not have to issue cheques and wait till the money is returned by the company. The guidelines are also applicable for investing in new fund offers (NFOs) of mutual funds.

Let’s understand this with an example: Say, you apply in an IPO to purchase shares worth Rs 1 lakh. This amount gets blocked in your account. On allotment, shares worth Rs 80,000 get credited to your demat account. The remaining amount, Rs 20,000, is unblocked by your bank and available for use.

Advantages: Earn interest, even on the blocked amount – This is mainly applicable if you are applying to an IPO. Since the money is debited only after the allotment, it continues to be in the bank and earns a rate of interest – especially important in the new regime whereby the bank has to pay interest, based on the daily balance.

The advantage is not-so-much, if you are investing in an NFO. Since even when you pay by cheque, the money is debited from you account only on the last day of the offer. R Mohan, chief compliance officer, India Infoline explains, “Asba shortens the allotment cycle, allowing the customer to keep rotating the amount. This is very helpful when there are back to back public issues.”

Bid cancellation: If you want to withdraw your bid, during the bidding period, you can simply approach your bank with a signed letter citing your application details.

But if you want to cancel, after the bid closure, you will have to send a withdrawal request directly to the registrars, who will instruct your bank accordingly. This will have to be done before finalisation of basis of allotment for the bid.

Asba is a consumer-friendly method of applying to IPOs or NFOs. But it is also a ‘do-it-yourself’ method. There is no intermediary involved in the process. So, while the facility has its pros, investors should be prepared to manage the entire transaction individually.

source: Business Standard

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