India’s Market Regulator Takes The UPI Route To Speed Up IPOs
Come July, any retail investor looking to subscribe to an initial public offering will have to whip out his or her phone and apply using the Unified Payment Interface or UPI platform. The rules, being implemented in phases, will lead to quicker verification of applicants and speed up the IPO process, the regulator hopes.
Last November, the Securities and Exchange Board of India issued a circular which required retail investors to use the UPI facility when subscribing to IPOs from Jan. 1, 2019 onward. The regulator later extended the deadline till July 1, 2019 as self certified syndicate banks, or those that are certified by the market regulator to facilitate IPO applications, were not ready.
Even now, only 21 out of 58 SCSBs are prepared to do so, shows information available on the regulator’s website. In order to be prepared to offer IPO subscription services via UPI, these banks need to have systems built on UPI 2.0, which offers the option to block funds in the user’s bank account.
New Rules For Retail IPO Investing
The circular directs retail investors to create a virtual payment address, or UPI ID, through the BHIM app or their bank mobile application. Thereafter, they have to provide this virtual address to their stock brokers and other intermediaries, under the application supported by block amount or ASBA facility, at the time of subscribing to IPOs.
The limit for retail IPO subscriptions is Rs 2 lakh. This is also the upper limit for UPI transactions.
Between January and March, the National Payments Corporation of India processed close to 6,000 transactions for retail investors that subscribed to recent IPOs, said a person familiar with the matter, who spoke on the condition of anonymity.
While the use of UPI has been optional till date, from July 1, 2019 it will be mandatory for all retail investors looking to subscribe to upcoming IPOs. Physical forms to block funds for an IPO application will be discontinued thereafter except for a small window. Existing facilities can be used only for a period of three months or for the next five public issues, whichever is later, the SEBI circular said.
The regulator has only permitted investors to invest through a bank-linked UPI ID. Third-party payment applications will not be permitted yet.
Benefits Of Using UPI
SEBI believes that using UPI-based platforms for IPO applications will cut down listing time from six to three days.
Gesu Kaushal, executive director at Kotak Investment Banking said over time, once the UPI mechanism settles-in, it will help in completing the allotment and listing process in a very short period of time after closure of the IPO. Through the purely electronic facility, “it will eliminate the movement of physical forms and other process risks,” she said.
At present, the allotment process involves several organisations, from stock exchanges, to market intermediaries like brokers, depositories and that clearing corporation that need to verify the transaction. This could lead to delays.
By using UPI, the process of authentication of a subscriber is speeded-up. This is because the UPI address is unique to the user and know-your-customer documentation would already have been done by the underlying bank while issuing the UPI ID.
“Currently the brokers have to submit the physical form to the banks, which they then verify the signature on the form and create a block in the customer’s account. This entire process takes a couple of days for the banks to place confirmation with the registrars and transfer agents,” said a spokesperson for ICICI Securities in an email response. The process will help reduce operational pain for customers and intermediaries, the spokesperson said.
The new mechanism will also reduce disputes, said Shirish Shah, vice president of compliance at KR Choksey Shares and Securities Pvt. Ltd.
Through this new mechanism the amount of disputes or arbitration that normally takes place at the stock exchange level will reduce to a great extent. Cost of compliance and cost of processing for the brokerages and other market intermediaries will also reduce.Shirish Shah, Vice President—Compliance, KR Choksey Shares and Securities Pvt. Ltd.
Customers, too, would benefit as the period for which funds are blocked is also cut down, said Shah. “Currently, it takes 10-15 days to reverse a retail investors’ funds after they is blocked for the IPO listing, but in the future this will reduce to a maximum of one week,” he said.
Emails sent to SEBI, BSE and National Stock Exchange of India seeking views on the transition to UPI-based IPO subscriptions went unanswered.
Adoption Of UPI
UPI-based transactions have soared over the last year, growing from Rs 27,000 crore in April 2018 to Rs 1.42 lakh crore as of April 2019, according to data from the NPCI website. The platforms are being used for peer-to-peer and peer-to-merchant transactions, even though the former forms the biggest chunk of volumes.
SEBI’s decision could add another use case for the platform.
“The market regulator is pushing UPI currently for the primary market and in the future I believe they will introduce it for the secondary market as well,” said Shah of KR Choksey.
Already, discount brokerage Zerodha Broking Ltd. sees a large percentage of UPI-based trading. “UPI-based transactions constitute 65-70 percent of transaction volumes when it comes to people funding their trading accounts, said Nithin Kamath, chief executive officer of the online brokerage. For higher value transactions, retail investors have the option to use net-banking or other payment facilities like RTGS or NEFT for higher value transactions, Kamath said.