Thoughts on the ASBA process – Part II

(The following post is contributed jointly by Prerak Ved of Crawford Bayley & Co. and Yogesh Chande of Platinum Partners.)

In continuation of the thoughts/concerns raised in Part I posted earlier, stated below are some further thoughts/concerns on the ASBA process, including those arising out of SEBI’s press release dated December 04, 2008 bearing PR No.283/2008 (the “Press Release”):

(1) As per the list of recognised SCSB’s available on the SEBI website, there are fifteen (15) SCSB’s recognised as on date. As per this list, there are 57 banks registered with SEBI as bankers to the issue, and all of them are eligible to be registered as SCSB’s; so the number of SCSB’s has the potential to increase. Typical small ticket issues had maybe one to two bankers, while mid-size and larger issues had between three and five, or maybe more (but never upto fifteen!!). Clause 16.1.7 read with Clause 16.1.5 of the DIP Guidelines requires certain details regarding SCSB’s SEBI registration status, as also whether any communication has been received from SEBI prohibiting from acting as an SCSB/banker, and any inquiry/investigation being conducted by SEBI. While obtaining such information may be easy if a few banks are involved, it would be cumbersome to obtain the relevant confirmations from all SCSBs. It would practically be difficult to obtain this information in case of fifteen SCSBs, and even more difficult if the number of SCSB’s reaches 25-30 or more. This is also given the fact that ASBA is currently is only for retail investors, and not for QIB and other non-retail investors. It may be noted that appointment of SCSBs is deemed in nature, irrespective of whether an applicant in the issue has an account with that bank or not. The responsibility lies on the merchant banker(s), and issue timelines may be adversely impacted if any SCSB does not furnish timely information in this regard for whatever reasons. An alternative suggestion in this area would be that SCSBs furnish this information to SEBI on a periodical basis, rather than handing the co-ordination for obtaining data for multiple SCSB’s to the merchant banker(s).

(2) In continuation of (1) above, the number of SCSB’s does not depend on the ticket size of the issue. We have seen some public and rights issues with minimal ticket size (even less than 50 crores, and 25 crores in some cases), which typically have a single lead manger and a single banker. The cost issues and co-ordination logistics for co-ordination with multiple SCSBs in case of these smaller issues may be too much to handle, and may end up discouraging issues with very small ticket size. In this regard, it may be desirable to set a threshold limit (let’s say, issue size of Rs. 25 crores) above which ASBA mechanism may be applicable.

(3) The scheme of DIP Guidelines seems to suggest that the issuer company has to pay the SCSB’s fees. While appointment is deemed by law, fees are left to the discretion of the parties. What happens if the issuer company and the concerned SCSB are unable to agree on the commercial aspects? There is a potential for disputes in this area, and a standardised fee schedule/fee calculation mechanism, even as a suggestion from SEBI, may help to mitigate potential disputes in this area, even though it may not be strictly within SEBI’s purview to do so.

(4) In case the SCSB does not unblock the funds from the applicant’s bank account for transfer to the issuer’s account for whatever reasons (even though beyond its control), would the underwriting obligations of the lead manager(s) get triggered? Hence the Underwriting agreement should be carefully drafted.

(5) In the Press Release, it has been decided to extend ASBA to rights issues also. While the initiative is laudable investor interest, it is difficult to understand as to if ASBA can be introduced in rights issues, why it cannot be introduced for fixed price public issues as well, and why it has been restricted only to book-built issues.

By Prerak Ved and Yogesh Chande

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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