Will SEBI’s Extension Of UPI Mechanism Pose IPO Troubles For Startups?

Will SEBI’s Extension Of UPI Mechanism Pose IPO Troubles For Startups?

SUMMARY

In November 2018, SEBI proposed UPI as an alternative payment option for retail investors buying shares through IPO

Phase 2 will continue until further notice given the prevailing uncertainty due to the Covid- 19 pandemic

By introducing UPI for IPOs, SEBI is looking to reduce the time duration from issue closure to listing

The timeline for implementation of Phase II of Unified Payments Interface (UPI) as an alternative payment option for retail investors buying shares in a public issue (IPO) was extended again at the end of the financial year 2020. In a circular dated March 30, 2020, the Securities and Exchange Board Of India said that phase 2 will continue until further notice given the prevailing uncertainty due to the Covid- 19 pandemic. 

The process was expected to get completed by the end of 2019 under three phases, thereby bringing online the complete bidding process for IPOs. The systems and processes for achieving Phase III timelines of T+3 need to be further deliberated and finalised in light of the experience gained during one of the major IPOs that opened and closed in the first week of March 2020,” mentioned the circular.

Prior to this, the process involved investors submitting a bid-cum-application form with any intermediary along with bank account details, and movement of such application forms from intermediaries to self-certified syndicate banks (SCSBs) for blocking of funds.

By introducing UPI for IPOs, SEBI is looking to reduce the time duration from issue closure to listing from current T+6 to T+3. The process was simple for investors. All they needed to do was fill an online application form with details like the demat account number, UPI ID, etc. and submit it to the intermediary of the IPO. Once the application is verified, the funds are blocked in the investor’s account via the sponsor bank. All the remaining steps remain unchanged.

“Use of UPI as a payment mechanism with ASBA for public issues through intermediaries will streamline the process of an IPO. It will ultimately enhance the efficiency and oust the call for manual intervention at various stages,” said Sumit Kochar, senior wealth and transaction advisor for Findoc Financial Services

UPI Mechanism For IPO Application: The Timeline So Far

  • In November 2018, SEBI proposed UPI as an alternative payment option for retail investors buying shares through IPO.
  • Phase 1 began (January 01, 2019 – March 30, 2019). Both UPI and the existing process and existing timeline of T+6 days continued operations in parallel. 
  • Phase 1 continued for the next three months, till June 30, 2019
  • Phase 2 began (July 1, 2019 – September 30, 2019). It was expected that the existing process of physical movement of forms and blocking of funds will be discontinued and only the UPI mechanism with an existing timeline of T+6 days will continue
  • In November 2019, Phase 2 extended till March 30, 2020
  • In March 2020, Phase 2 extended again until further notice due to Covid-19

Traditional Vs UPI Mechanism: Pros And Cons

Being a new process with several stakeholders and technological systems, there are bound to be some bumps along the road. Last year, the IRCTC IPO saw many investors irked as they could not participate due to several banks not gearing up for UPI-based applications. There were also glitches in the application made by minors, HUFs, etc. 

However, barring the initial teething problems where investors were trying to understand the basic flow of the process, this is a positive move believe industry stakeholders such as Groww founder Harsh Jain and Jashan Arora, director, Master Capital Services. According to experts, UPI offers a lot of benefits over the traditional process. 

  • Investors no longer needed to visit the bank for the IPO application
  • The amount remained blocked in their accounts and earned interest too
  • The debit occurred only after the allotment
  • There was no need to wait for the refund to arrive
  • There were no additional charges for this new mechanism
  • The mechanism is faster and secure to transfer funds, especially for larger amounts
  • While proceeding to invest, the UPI ID can be used for blocking the funds

“The platform has seen acceptance and an increase in the adoption rates, given the number of applications received in ASBA with UPI as a payment mechanism,” added Arora.

Kochar shared a different viewpoint here. Historical data suggests that many retail investors are losing faith in UPI due to recent fraudulent activities causing digital thefts in the account of various investors. The biggest challenge which SEBI has to tackle is the retail investor’s readiness to use digitised process.

Amid all these challenges, applications made using incorrect UPI handle or using a bank account of SCSB or a bank not mentioned in the list of UPI enabled bank would pose a bigger problem for the issuer as these applications will be liable to be rejected.

“The same leads to more reluctance and loss of faith from investors on such UPI platforms causing issues to investors and opportunity loss as well,” he added.

Impact Of UPI Mechanism On Startups

In the Indian startup ecosystem, investors do not have a fool-proof exit strategy. For most investors, mergers and amalgamation have been the best way to exit their portfolio companies. However, in 2018-2019, the number of unicorns in India grew to 30 and many also announced plans for IPOs, including the likes of Ola, OYO, Freshworks and others

Bringing the bidding process online and reducing the listing timeline to T+3 days will be a cherry on the cake here, and will encourage more startups to take the IPO route. 

With increasing internet penetration and the busy schedules of millennials, the online process is expected to ensure an increase in the number of IPO bids as well. 

“Also, with an increase in UPI transactions, especially after the demonetisation of Rs.500 and Rs.1000 banknotes, the acceptance of this new mechanism, was easier too,” said Groww’s Jain.

In the current situation, analysts believe that the delay in making UPI the default mode would not affect the retail investing for at least next three months as the new public issues are not in the pipeline due to the recent bloodbath in the stock market. Retail investors are facing liquidity issues currently and are investing cautiously which was seen in the SBI Cards IPO which after much anticipation listed below the issue price and is presently trading close to 33% below list price.

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