Introduction
The capital market is an important part of the financial system that helps companies, governments, and institutions raise long-term funds for business expansion, infrastructure development, and economic growth. It acts as a bridge between investors who have surplus money and organizations that require funds for investment purposes. The capital market includes various financial instruments such as shares, debentures, bonds, and other securities which are traded through organized stock exchanges and financial institutions.
In modern financial markets, raising capital efficiently while protecting investor interests is extremely important. Therefore, the Indian securities market is regulated by the Securities and Exchange Board of India, which introduces various mechanisms and guidelines to improve transparency, efficiency, and investor confidence. Among these mechanisms, Applications Supported by Blocked Amount (ASBA) and Qualified Institutional Placement (QIP) are two significant concepts related to the issue of securities in the primary market.
ASBA is an investor-friendly application mechanism used during Initial Public Offers (IPOs), Follow-on Public Offers (FPOs), Rights Issues, and other public issues. Under this system, the investor’s application money remains blocked in the bank account and is debited only if shares are allotted. This system improves convenience for investors and removes the problem of refund delays.
On the other hand, Qualified Institutional Placement (QIP) is a capital-raising mechanism through which listed companies raise funds from Qualified Institutional Buyers (QIBs) such as mutual funds, insurance companies, pension funds, and foreign institutional investors. QIP was introduced by SEBI to encourage Indian companies to raise capital domestically instead of relying excessively on foreign markets.
Both ASBA and QIP have played an important role in strengthening the Indian capital market by improving efficiency, increasing transparency, protecting investor interests, and facilitating easier access to capital for companies.
ASBA and Qualified Institutional Placement (QIP)
Capital markets play a very important role in mobilizing savings and channelizing them into productive investments. In order to make the process of raising capital more efficient, transparent, and investor-friendly, the Indian financial system uses several mechanisms and regulatory frameworks. Two important concepts related to capital raising in the primary market are Applications Supported by Blocked Amount (ASBA) and Qualified Institutional Placement (QIP). Both systems were introduced by the Securities and Exchange Board of India to improve efficiency in the securities market and strengthen the Indian capital market ecosystem.
Applications Supported by Blocked Amount (ASBA)
Introduction to ASBA
Applications Supported by Blocked Amount, commonly known as ASBA, is a process developed by SEBI for applying to public issues such as Initial Public Offers (IPOs), Follow-on Public Offers (FPOs), Rights Issues, and other securities offerings. Under this system, the investor’s application money remains blocked in the bank account instead of being transferred immediately to the issuing company. The amount is debited only if shares are allotted to the investor after the basis of allotment is finalized. If shares are not allotted, the blocked amount is released automatically.
The ASBA mechanism was introduced to remove the inefficiencies present in the earlier IPO application process, where investors had to pay money upfront through cheques and then wait for refunds if shares were not allotted. ASBA has made the application process faster, safer, and more convenient for investors.
Meaning and Working of ASBA
ASBA means “Applications Supported by Blocked Amount.” It is an application process in which the investor authorizes the bank to block a certain amount in the bank account for subscribing to a public issue. The money continues to remain in the investor’s account and earns interest until the allotment process is completed.
When an investor submits an ASBA application, the bank blocks the required amount equivalent to the application value. However, the amount is not debited immediately. Once the allotment of shares is finalized, only the amount corresponding to the allotted shares is debited from the investor’s account and transferred to the issuing company. If no shares are allotted, the blocked amount is released entirely.
This mechanism eliminates the need for refunds because the investor’s money never leaves the account unless allotment occurs. Thus, ASBA significantly reduces delays and operational difficulties associated with refund processing.
Development and Evolution of ASBA
Initially, the ASBA facility was available only to Qualified Institutional Buyers (QIBs) for participating in IPOs. Over time, SEBI expanded the scope of the ASBA mechanism and made it mandatory for all categories of investors, including Retail Individual Investors, Qualified Institutional Buyers, and Non-Institutional Investors.
The objective behind introducing ASBA was to improve efficiency in the IPO process, reduce unnecessary movement of funds, and protect investor interests. Before ASBA, investors often faced long delays in receiving refunds for unsuccessful applications. There were also risks related to cheque processing, refund failures, and operational inefficiencies. ASBA resolved these issues by ensuring that money remains safely in the investor’s account until allotment.
Role of Self Certified Syndicate Banks (SCSBs)
The ASBA process operates through Self Certified Syndicate Banks, commonly known as SCSBs. These are banks recognized by SEBI to provide ASBA services to investors. SCSBs play a central role in the ASBA mechanism because they are responsible for accepting applications, blocking funds, uploading bid details to the stock exchange platform, and transferring money after allotment.
When an investor submits an ASBA application, the SCSB verifies the details provided in the form and blocks the application amount in the investor’s account. After the allotment process is completed, the bank debits the allotted amount and releases the remaining blocked funds.
As of September 2024, around 53 banks were functioning as SCSBs. Some major SCSBs include State Bank of India, Punjab National Bank, Bank of India, Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, and UCO Bank. Most large banks now provide ASBA facilities through internet banking and mobile banking platforms.
ASBA Application Process
The ASBA process is simple and investor-friendly. First, the investor fills out the ASBA application form either online through net banking/mobile banking or physically through a bank branch. The investor authorizes the bank to block the required application amount in the account. The SCSB then uploads the bidding details into the electronic bidding system of the stock exchange.
After the issue closes, the basis of allotment is finalized. If shares are allotted to the investor, the corresponding amount is debited from the account. If shares are not allotted, the blocked amount is released automatically. This process ensures efficiency, transparency, and safety in public issue applications.
Benefits of ASBA
Interest Continues on Blocked Amount
One of the biggest advantages of ASBA is that the investor’s money remains in the bank account until allotment. Since the amount is only blocked and not transferred immediately, the investor continues to earn interest on the balance amount during the application period.
Elimination of Refund Delays
Before ASBA, investors had to wait for refunds if shares were not allotted. Sometimes refund delays created inconvenience and uncertainty. ASBA eliminated this issue because funds are debited only after allotment. If shares are not allotted, the blocked amount is automatically released without any separate refund process.
Faster and More Convenient Process
The ASBA process is faster and more convenient compared to the earlier cheque-based application system. Investors can now apply for IPOs through internet banking and mobile banking without visiting banks or submitting physical forms. This has increased participation in the securities market.
Easy Revision and Withdrawal of Bids
ASBA also allows investors to revise or withdraw their bids before the closure of the issue. This flexibility helps investors make changes according to market conditions and investment decisions.
Better Investor Protection
Since the investor’s money remains in the bank account until allotment, the risk of misuse of funds is minimized. ASBA therefore provides better protection and transparency for investors.
Drawbacks of ASBA
Dependence on SCSB Banks
An investor must have an account with a bank that provides ASBA services. If the investor’s bank is not an SCSB or does not provide online ASBA facilities, participation becomes difficult.
Requirement of Physical Visit in Some Cases
Although most major banks offer online ASBA facilities, some investors may still need to visit the bank branch physically if online services are unavailable. This may create inconvenience for investors living in remote areas.
Risk of Typographical Errors
The ASBA process is also prone to errors because banks may not validate details such as Demat account numbers, Depository IDs, or number of shares applied for. Even a small typing mistake may result in rejection of the application.
Qualified Institutional Placement (QIP)
Introduction to QIP
Qualified Institutional Placement (QIP) is a method through which listed companies raise capital by issuing securities to Qualified Institutional Buyers (QIBs). It is a form of private placement where securities are issued only to institutional investors instead of the general public.
Under QIP, companies can issue equity shares, fully convertible debentures, partly convertible debentures, and other convertible securities except warrants. QIP is considered one of the fastest and most efficient methods for listed companies to raise funds domestically.
Purpose Behind Introduction of QIP
SEBI introduced the QIP mechanism on May 8, 2006, with the objective of encouraging Indian companies to raise funds within the domestic market rather than depending excessively on foreign markets.
Before the introduction of QIP, many Indian companies preferred raising money abroad through instruments such as American Depository Receipts (ADRs), Global Depository Receipts (GDRs), and Foreign Currency Convertible Bonds (FCCBs). This trend was seen as an undesirable export of the domestic capital market because Indian companies were increasingly depending on foreign investors and overseas exchanges.
To address this issue, SEBI introduced QIP guidelines to make domestic fund raising easier, faster, and more attractive for Indian companies.
Qualified Institutional Buyers (QIBs)
Qualified Institutional Buyers are institutional investors considered financially strong and capable of evaluating investment risks independently. These entities are believed to possess the expertise and financial capacity necessary for investing in capital markets.
QIBs include mutual funds, foreign institutional investors, venture capital funds, foreign venture capital investors registered with SEBI, public financial institutions, insurance companies registered with the Insurance Regulatory and Development Authority of India, state industrial development corporations, provident funds with a minimum corpus of ₹25 crore, and pension funds with a minimum corpus of ₹25 crore.
These institutional investors are not required to separately register as QIBs if they already belong to the prescribed categories.
Features and Working of QIP
In a QIP issue, securities can be issued only to Qualified Institutional Buyers who are not promoters or related to promoters of the issuing company. The issue is managed by a SEBI-registered merchant banker.
Unlike a public issue, there is no requirement for extensive pre-issue filing with SEBI. Instead, the placement document is uploaded on the websites of the stock exchanges and the issuing company with a disclaimer stating that the issue is meant only for QIBs on a private placement basis.
SEBI has also prescribed pricing guidelines for QIPs. The issue price cannot be lower than the higher of the average weekly high and low closing prices of the related shares during the preceding six months or the preceding two weeks.
There are also rules regarding the number of allottees. If the issue size is up to ₹250 crore, there must be at least two allottees. If the issue size exceeds ₹250 crore, there must be at least five allottees. No single allottee can receive more than 50 percent of the total issue size.
The aggregate amount raised through QIPs in a financial year cannot exceed five times the company’s net worth according to the previous audited balance sheet.
QIP in India and the United States
In the United States, private placements to institutional investors are governed by Rule 144A under the Securities Act of 1933. Under this rule, issuers can privately place securities with Qualified Institutional Buyers having large investment capacity, generally at least 100 million dollars under management.
Rule 144A was introduced by the U.S. Securities and Exchange Commission in 1990 to make American capital markets more attractive to foreign issuers.
In India, SEBI introduced QIP to make Indian capital markets more attractive to domestic issuers. While Rule 144A focuses on attracting foreign issuers to U.S. markets, the Indian QIP framework encourages Indian companies to raise funds domestically instead of depending on overseas markets.
Benefits of Qualified Institutional Placement (QIP)
Faster Capital Raising
QIP is one of the quickest methods available for raising capital. Compared to Follow-on Public Offers and Rights Issues, the process is much faster and involves fewer procedural delays.
Reduced Regulatory Burden
QIPs involve fewer legal and regulatory formalities compared to public issues. This reduces compliance burden and speeds up fund raising.
Cost Efficiency
QIPs are cost-effective compared to overseas fundraising instruments such as ADRs, GDRs, and FCCBs. Companies can avoid heavy legal fees, overseas listing charges, and expenses related to compliance with international accounting standards.
Encouragement to Domestic Capital Markets
QIP helps strengthen Indian capital markets by encouraging companies to raise funds through domestic stock exchanges such as the Bombay Stock Exchange and the National Stock Exchange of India instead of foreign exchanges.
Better Liquidity and Exit Options
QIPs provide institutional investors with easier liquidity and exit opportunities through recognized stock exchanges. Unlike preferential allotments, QIPs provide a more flexible exit mechanism.
Difference Between ASBA and QIP
ASBA and QIP are both important mechanisms in the capital market, but they serve different purposes. ASBA is an application and payment mechanism used by investors while applying for public issues such as IPOs and FPOs. Its main objective is to ensure safe and efficient handling of investor funds during the allotment process.
On the other hand, QIP is a capital-raising method used by listed companies to raise funds from institutional investors through private placement. While ASBA focuses mainly on investor convenience and fund blocking, QIP focuses on fast and efficient fund mobilization for companies.
Conclusion
ASBA and Qualified Institutional Placement are important innovations introduced by SEBI to improve the efficiency and transparency of the Indian capital market system. ASBA has transformed the IPO application process by ensuring that investor funds remain secure until allotment. QIP, meanwhile, has provided listed companies with a faster and more efficient method of raising capital domestically.
Both mechanisms have contributed significantly to strengthening India’s financial markets, improving investor confidence, and encouraging greater participation in the securities market.