IPO through ASBA - your money will be there in your a/c till this process ends

What's ASBA?

ASBA is an application process for subscribing to book built IPOs and rights issues. This system ensures that the applicant's money remains in his bank account but it is blocked till the shares are allotted. Upon allotment, the proportionate amount of money is released from the bank account.

When introduced in 2008, ASBA could be availed only by retail investors. Recently, this clause was amended to accommodate corporate investors and high net worth investors from January 1, 2010.

20 Microns was the first company to give investors the option of applying though ASBA. Out of 25,003 applications received from retail investors, 9.7 per cent were received through ASBA. Even in the more recent NPHC IPO, nearly 1.5 lakh retail investors applied though ASBA. This accounted for 11.7 per cent of total retail application.

How it works

Under this mechanism, an investor is required to give an authorisation to his bank to block the application money in his account in order to subscribe for the IPO. Apart from the amount set aside for IPO, the bank account can be freely used for any other purpose.

The money set aside for IPO is debited only after the allotment is finalised or the IPO is withdrawn or it fails. Not all banks are authorised to provide this service. Only select 24 banks known as Self Certified Syndicate Banks (SCSBs) are capable of providing the ASBA service to investors. These banks are listed in the Web sites of SEBI, BSE and NSE.

While applying for the offer, you can choose to pay through ASBA or through cheque. There is a separate form for applying through the ASBA and once you decide to go through this route, you cannot make another application through a cheque. If you apply through a cheque and ASBA, your application will be rejected on grounds of multiple applications.

Advantages

Applying through ASBA is not mandatory. But considering its advantages, it may turn out a better proposition than the usual cheque payment route, with the biggest benefit being that you don't have to bother about the refund process.

The money required for allotment is taken from the bank account only when the basis of allotment is finalised and the application is selected for allotment.

Remember, you can bid only at the cut-off price. Therefore you stand a good chance of being allotted a fair portion of the shares you have applied for. Note that once you have submitted your bid, you cannot revise it, though you may withdraw from the bidding.

Since the money remains with the bank account till then, you don't have to worry about forgoing interest for that period.

Moreover, this process ensures more transparency since you come to know how exactly the allotment process took place.
source :business line