What is ASBA?
Every company needs to raise funds for various reasons such as repayment of debt, capital requirement, expansion etc. As the need for funds is universal, the Securities and Exchange Board of India, which regulates the securities market, has developed several ways to allow companies to raise funds from the public. These companies can use Initial Public Offering, Rights Issue, Follow on Public Offer etc., to ensure effective fundraising. However, as the process includes investors using their savings, the application process can become tedious based on the outcome of the application process.
Previously, investors had to issue cheques or demand drafts and visit their stockbroker physically to apply. However, SEBI introduced a process called ASBA to do away with the physical documentation applied to fundraising applications.
More about ASBA process?
ASBA, also known as Application Supported by Blocked Amount, is an application process wherein the investor can apply to various fundraising activities such as Initial Public Offering (IPO), Follow on Public Offer (FPO), Rights Issue etc. The process of ASBA was developed by the Securities and Exchange Board of India (SEBI) to block money in the bank account rather than complete debit and subsequent refund.
The ASBA process blocks the application amount in the bank account after the investor authorises the ASBA prompt. The investor continues to earn interest on the blocked amount but can’t use or withdraw the blocked amount until the application process is completed. If the investor gets the application, the blocked amount is then debited, and if not, the blocked amount is released for normal usage.
Understanding the ASBA process
Before 2016, if investors wanted to apply to an IPO and other fundraising activities, the whole application amount was instantly debited from the bank account. It kept the investors from earning interest on the amount and created an extended process for SEBI and other intermediaries to keep track of the money and refund it to investors in case of non-application.
However, with ASBA, the bid amount is not instantly debited but is blocked within the bank account to allow investors to earn regular interest. Only if an investor gets the application the blocked amount is debited from the bank account.
Benefits of ASBA
ASBA is considered to be the best method to apply for an IPO and other applications. Because of its numerous benefits, SEBI has made it mandatory after 2016 to apply to an IPO through ASBA only by a non-retail investor. Still, a majority of retail investors use ASBA for fundraising activities. It is because of the following ASBA benefits:
Quick and Free: ASBA is a hassle-free process that comes with many pre-filled options for quick submission. It only takes less than 5 minutes to fill out the application, which is fully free of cost and can be filled out at the investor’s convenience.
Interest Income: When an application is submitted through the ASBA process, the money is blocked and not debited. It allows investors to keep earning interest on the amount until the application process is completed.
Safe and Transparent: The ASBA is one of the safest and most transparent application processes as the investor personally authorises the blocking of funds. Furthermore, as the bank and the intermediary analyse the application, there are negligible chances of fraud or other financial blunders.
Online Process: Unlike before, where investors needed physical cheques and demand drafts to apply to such applications, the ASBA process is completely digital. It uses the net banking feature without the need for physical document submission.
Automatic Debit or Unblock: The ASBA process allows investors to ensure that they receive an automatic refund if they are not allotted the shares in the application. In case the shares are allotted, the amount is automatically debited from the bank account without any further steps.
Criteria of ASBA
The ASBA process is established by the Securities and Exchange Board of India to facilitate Indian investors with a safe and hassle-free application process. However, there are some eligibility criteria one must fulfil to be able to utilise the ASBA process:
- The investor must be an Indian residential investor.
- A PAN Card issued by the government of India.
- Open a Demat and trading account with a licensed stockbroker.
- A valid bank account with a licensed bank.
- Apply through logging in to the net banking feature of the bank.
- Have an adequate balance in the bank account for blocking.
- Bid at the cut-off price and choose a minimum of one lot.
- Bid for the application using the reserved specified category.
- The investor must agree to the terms and conditions before submitting.
ASBA is a process of application supported by blocked amounts where the investors do not have to submit physical documents or lose out on interest payments. The ASBA process is quick, simple and safe for the investors to apply to IPOs, FPOs etc., without paying any fee or commission. However, an investor must open a Demat and trading account and have it linked with the bank account to utilise the ASBA feature established by SEBI. You can visit the IIFL website for opening a Demat and trading account.
Frequently Asked Questions Expand All
No, the ASBA process does not provide a preferential benefit to the investors in the case of the allotment of shares. Although it is the safest way, your chances are the same if you apply through other means.
Yes, your ASBA form can be rejected if you put the wrong information in the form. You should double-check the information you put in before submitting it.
No, your entire bank account will not be blocked and only the amount equalling the application amount is blocked.
Yes. all issues include the feature of applying using the ASBA process.