How technology has changed the way one applies for IPOs

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The humongous response to the four Initial Public Offering (IPOs) last week is a reflection of how investors are taking the IPO route for wealth creation. This is not just indicative of the availability of surplus funds for investment, but also of the ease with which one can apply for IPOs these days.

When I first started applying for IPOs five decades ago, in the 1970s, the process was not only cumbersome and time consuming but also full of tension for the investor, because the onus of monitoring the process from application to receipt of physical shares was with him.

As millennials may find it hard to imagine what the earlier system was, let me give a peek into how it worked in the 1970s and subsequent decades before the system was tweaked to make it more investor friendly, with technology being applied at every stage. The transformation from the physical process to a technology-based system, which allows an investor to apply for an IPO in less than a minute, has been achieved in phases and over several years.

As I still continue to apply for IPOs, I have lived through this transformative phase over the past 50 years.

Physical Forms

The first task earlier was to get hold of physical forms, which were either mailed to the investor by the broker, if one happened to be a regular investor, or had to be picked up from the banks associated with an IPO. The sight of agents squatting on the ground outside the banks or at vantage points like cinema halls, with forms of various companies offering IPOs neatly laid out, was not uncommon.

One could pick up as many forms as one wanted as they were supplied by brokers, whose relevant code was stamped on the form, since they earned a brokerage on the shares allotted on these forms. Physical forms are no longer needed since IPO applications are now submitted online. It will be interesting to assess the quantum of paper saved due to elimination of physical forms and its favourable impact on the environment.

The application forms were not only required to be filled in neatly with details but also needed cross checking to see that all columns were duly completed lest the application got rejected. The information to be filled in now is minimal since the applications carry the income tax Permanent Account Number (PAN), which has most of the required details.

The forms along with the cheque for payment, then had to be physically deposited in a bank branch, which meant long queues, notwithstanding the fact that banks invariably had separate counters for collection of application forms. The task of depositing could take up to 30 minutes, depending on the popularity of the company offering shares. Most investors ventured to apply for all IPOs. Unlike today, when a company offering an IPO is analysed by experts on digital, television and print media, there was little or no information available on the future prospects of a company. Investors were thus saddled with shares of a lot of dud companies.

Benefits Of ASBA

Even as banks stamped and returned the counterfoil attached with the form as proof of collection, the investor anxiously waited for money to be debited from the bank account as final proof of the form having been received and accepted. This check also had to be done manually, since in that era, banks issued physical passbooks. In the current system, not only the banks but also the depository agencies notify the investor regarding the submission and acceptance of an application.

The process of share allotment could take up to a month and one got to know of allotment of shares or non-allotment only when one received either the physical shares by post—there was no concept of online checking of allotment as it exists today, or the refund of paid money, since cheques submitted with application forms were actually encashed.

One simply can’t visualise the volume of work for banks and companies offering shares in the absence of today’s ASBA (application supported by blocked amount) facility—encashment of cheques deposited with applications, reissuing of cheques to those unlucky to have not been allotted shares, and then again seeing refund cheques being deposited by these investors. For an investor, encashment of a refund cheque meant losing out on monthly interest on the amount paid with the application. Adding to the physical strain was that investors also had to visit the bank to deposit the refund cheque.

Ease Of Applying

Most problems arose when neither shares nor refund cheques were received and an investor had to chase banks and the company to have the problem addressed. One could sympathise with the investors, the banks and the companies issuing shares because a large volume of applications had to be physically handled in the absence of technology.

Since shares allotted were in physical form, there was enough scope for disputes at the time of sale—signatures not matching being the most common one. This was besides the cases of shares being misplaced or getting damaged while in the possession of the investor. Such problems no longer exist because shares in digital format are credited directly in the Demat account and depositories/banks take care of these issues.

The ease with which one can apply now through bank apps has transformed the experience. New regulations and technology have ensured efficiency and flawless operation right from making an application to eventual crediting of shares in Demat accounts, if allotted, or the money blocked under ASBA being released in less than a week of applying.

Most importantly, there is no loss of interest since the money is withdrawn only if shares are allotted. The prevailing system also keeps an investor informed at every stage through SMS or email, which is a big boon, eliminating the tension that investors had to endure earlier. The effort on the part of the investor is now minimal, and it takes only a minute or so to apply, effortlessly.

If one example is to be cited of technology revolutionising a particular business and keeping pace with investor requirements, it is the stock market. The adoption of technology has benefited a large number of retail investors in multiple ways and is responsible for the boom in IPOs.

Jitender Bhargava is a former executive director of Air India and an avid investor for 50 years. Views are personal, and do not represent the stand of this publication