IPO rule change: Investors need money in bank account to make bids; here's how to buy IPO

In a key development, the Securities and Exchange Board of India (Sebi) has put forth a change in the processing of initial public offerings or IPOs. The security board has now said that the IPO applications should only be processed if, there are supporting funds in the investor’s bank account. The new change comes after the regulator learnt that investors were inflating the subscription numbers by making bids with no intention of getting allotments.  

Sebi has now said that the stock exchanges will only process IPO applications with ensured security. “Stock exchanges shall accept the ASBA (Application Supported by Blocked Amount) applications in their electronic book building platform only with a mandatory confirmation on the application monies blocked,” the regulator recently said in a circular. The new circular will come into effect on September 01, 2022.

IPO rule change explained

Sebi learnt that large institutional investors and high net worth individuals were making bids for various IPOs to inflate the subscription numbers. Following this, the regulator issued a circular stating that the stock exchanges will only be allowed to accept applications if the investor’s account contained monies required for the allotment. However, the new rule shall not apply to all categories of investors including retail, qualified institutional buyers (QIBs), non-institutional investors (NIIs), and other reserved categories.

According to the circular, the new IPO rule change will be applied to issues opening on or after September 01, 2022. It is pertinent to note that the new circular follows the Life Insurance Corporation’s (LIC’s) IPO where multiple applications were cancelled as investors didn’t have sufficient funds in their bank accounts. About 20 lakh applications were cancelled in the runup to the Rs 21,000 crore state-run insurer’s IPO. Market experts opined that the new rule introduced by the Sebi will give out the real IPO subscription numbers and thus encourage only the bidders who wish to get the allotment.

How to buy an IPO?

Despite the rule change in application allotment, the process of applying for an initial offering will remain the same. Investors can log in to any trading platform and select the IPOs of companies open for subscription. Enter the number of lots and price to apply for and put in the application through UPI ID. As per the new circular, the allotment will only be made if the investor has supporting funds in the bank account.

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