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Compensation to retail investors in an IPO

Finsec Law Advisors

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The IPO application process has been greatly streamlined due to the introduction of mandatory ASBA (Applications Supported by Blocked Amount). However, issues have arisen in cases where IPO applicants have failed to secure allotment due to failures on part of the Self Certified Syndicate Banks (“SCSBs”) to make bids, process ASBA applications, or other failures resulting in the rejection of application forms. SEBI has recognized that the IPO applicants may suffer an opportunity loss in such cases and has therefore issued a circular on February 15, 2018 putting in place a mechanism to compensate the IPO applicants for losses suffered due to shortcomings on part of the SCSBs.

The circular prescribes a uniform policy for calculation of minimum compensation payable to investors. The calculation formula takes into account a) the opportunity loss suffered by the investor due to non-allotment of shares; b) the number of times the issue was oversubscribed in the relevant category; c) the probability of allotment; and d) the listing gains if any on the day of listing. The formula is as follows:

In case of non-oversubscribed issues, IPO applicants would be compensated for all the shares which they would have been allotted. However, no compensation would be payable to the applicant in case the listing price is below the issue price.

Applicants seeking redressal in cases where their application has not been considered for allotment, due to failure on the part of the SCSB, may make an application with the relevant SCSB within three months from the date of listing and the SCSB would be obligated to resolve the matter within 15 days therefrom, failing which they would be liable to pay 15% interest p.a. beyond the 15-day period. This new compensation mechanism brings further certainty to investors and will ensure that SCSBs carryout their functions with due care.