Last two weeks have been quite troublesome for the stock market investors (and traders). A plethora of reasons are being supplied to support equal number of theories explaining the crash. One of them is the lack of liquidity. Interesting as the it is - liquidity - it has, sort of, liquidated the joyous sentiments of the buoyant market. With the FIIs short selling their stake in the bullish emerging markets to cover up the gargantuan losses incurred in West (particularly US), courtesy the mess perpetrated by geniuses of Harvard and Stanford alumni, the market was low on funds. To complicate the matter even further, there was a big ticket IPO from Reliance and a heavily subscribed IPO from the Future Group. These two public offers, along with other smaller, low-visibility ones, had raked in crores of rupees (and dollars too). With the countrywide panic spread post market crash, so much was the credit crunch that many people withdrew their applications for Reliance or ordered stop payments for the cheques, calling for cancellation of the bid cum application form.
Now, one major cause of this bottleneck of funds - liquidity crunch, as it is known - was that the money was stuck in the middle of nowhere. It takes over 2 weeks for the refunds to reach the retail customer from the date of application. Interestingly, this applies to those customers also who opt for electronic payment by subscribing to the offer using online trading sites. To my understanding, the latter bear the brunt of apparent lock-in of funds so as to be kept at par with the former, who apply using the slower channel, viz. cheques.
A better alternative to this process could be to overhaul the payment process. It would call for payment only in the case when the allotment has occurred. This would save the time in processing the cheques of the applicants in the first place and reprocessing of the balance amount to be credited back. The interest loss on the amount can also be saved. Moreover, it can even help to put a check on not-so-encouraged practice of picking loans to apply for IPOs. This process can, however, breed speculation and over subscription, as the applicant is to pay the sum only after allocation. The menace of over subscription is much more visible in the QIB section, where only 10% of the bid amount is required to deposited. This can be prevented by mandating the applicant - retail ones, at least - to keep a stipulated fraction of the applied money available in the account, till the time the allotment process is on. This also calls for a overhaul in the book building process. In fact, market regulator SEBI is planning to put in norms to cut down the book building process time, to circa one week. Now, requiring the applicant to spare a fraction of application money in the account for one week isn't outrageously unreasonable. The purported proposal assumes that the applicant has account in a bank, that has incorporated latest technologies like Core Banking Solution, ECS remittance or RTGS payments. Also, that the bank either itself is a Depositary Participant (DP) or has syndication with an existing DP. This is required to connect the Demat account of the applicant with the funds account.
With two of the topmost banks in the country facilitating its customers with world class online access to their banking accounts, it looks feasible. If not now, then in near future. For Internet savvy public, cheques are already passe, and quite right so. Not only cheques are outdated, slow and tedious but also, unfriendly to the environment. Nowadays, anyway, the Environment is ostensibly perceived to be hotter than the stock markets!
_______________________________________
Addendum 2: Now, SEBI formalises a method under the name of Application Supported by Blocked Amount. The BSE puts it in an even simpler way.
Addendum: RBI came up with a fiat similar to the fix suggested above (http://www.livemint.com/2008/04/07004211/Sebi-will-reduce-IPO-listing-t.html). Also see- http://news.bbc.co.uk/2/hi/business/7417303.stm
Now, one major cause of this bottleneck of funds - liquidity crunch, as it is known - was that the money was stuck in the middle of nowhere. It takes over 2 weeks for the refunds to reach the retail customer from the date of application. Interestingly, this applies to those customers also who opt for electronic payment by subscribing to the offer using online trading sites. To my understanding, the latter bear the brunt of apparent lock-in of funds so as to be kept at par with the former, who apply using the slower channel, viz. cheques.
A better alternative to this process could be to overhaul the payment process. It would call for payment only in the case when the allotment has occurred. This would save the time in processing the cheques of the applicants in the first place and reprocessing of the balance amount to be credited back. The interest loss on the amount can also be saved. Moreover, it can even help to put a check on not-so-encouraged practice of picking loans to apply for IPOs. This process can, however, breed speculation and over subscription, as the applicant is to pay the sum only after allocation. The menace of over subscription is much more visible in the QIB section, where only 10% of the bid amount is required to deposited. This can be prevented by mandating the applicant - retail ones, at least - to keep a stipulated fraction of the applied money available in the account, till the time the allotment process is on. This also calls for a overhaul in the book building process. In fact, market regulator SEBI is planning to put in norms to cut down the book building process time, to circa one week. Now, requiring the applicant to spare a fraction of application money in the account for one week isn't outrageously unreasonable. The purported proposal assumes that the applicant has account in a bank, that has incorporated latest technologies like Core Banking Solution, ECS remittance or RTGS payments. Also, that the bank either itself is a Depositary Participant (DP) or has syndication with an existing DP. This is required to connect the Demat account of the applicant with the funds account.
With two of the topmost banks in the country facilitating its customers with world class online access to their banking accounts, it looks feasible. If not now, then in near future. For Internet savvy public, cheques are already passe, and quite right so. Not only cheques are outdated, slow and tedious but also, unfriendly to the environment. Nowadays, anyway, the Environment is ostensibly perceived to be hotter than the stock markets!
_______________________________________
Addendum 2: Now, SEBI formalises a method under the name of Application Supported by Blocked Amount. The BSE puts it in an even simpler way.
Addendum: RBI came up with a fiat similar to the fix suggested above (http://www.livemint.com/2008/04/07004211/Sebi-will-reduce-IPO-listing-t.html). Also see- http://news.bbc.co.uk/2/hi/business/7417303.stm
No comments:
Post a Comment