Upfront IPO payment may go

No practice of upfront payment with applications anywhere, says  J M Morgan Stanley chairman Nimesh Kampani.

The Securities and Exchange Board of India (Sebi) is examining the feasibility of doing away with the system of asking for upfront payment from non-institutional investors in primary issues.

The issue has landed in Sebi's court after a task force, set up to examine issues relating to the primary markets, suggested that institutional investors should be made to put up a ten per cent margin while making an application for an initial public offer (IPO). The task force submitted its report last month.

But the merchant banking community has made a counter-proposal. Arguing that if the idea of the proposed system is to bring all categories of investors at par, then a simpler and "judicious" solution will be to stop the system of asking for upfront payment from all investors.

J M Morgan Stanley chairman Nimesh Kampani said the merchant banking community had impressed upon Sebi to drop the upfront payment requirement. Internationally, there is no practice of upfront payment of money with applications to issues.

Money is paid out only in the event of allotment. In India too, institutional investors pay up only on allotment but non-institutional investors have to pay the entire amount at the time of applying.

In fact, investor bodies too have represented that the current system blocks investors' funds for a long period of time, with no guarantee that they will ultimately get allotment.

And, in case there are a set of back-to-back issues, investors are put to a lot of hardship as investors are out of funds till such time they receive the refunds.

The only beneficiaries in this case, investor bodies have argued, are the banks which get access to a lot of float money.

Kampani said that the regulator should do away with the need for upfront payment altogether as institutional investors might not be so amenable to payment of any money at all.

"They would rather buy the shares in the secondary market and then, who will subscribe to the issues," he pointed out.