Markets

Use of UPI for IPOs can boost capital market participation

By Nithin Kamath

Indian capital markets have struggled to increase active retail participation over the last 2 decades since exchanges went online. We still have only around 5 million unique Indians actively investing into stocks and 10 million in mutual funds. This seems almost negligible if you were to compare it to the growth and size of ecommerce platforms, wallets, and now UPI.

UPI (Unified payments interface) is an immediate real time payment system that helps instantly transfer funds between two bank accounts through a mobile. In November, UPI with over 500 mn transactions exceeded Amex global transactions. It is just a matter of time before UPI is bigger than even Master and Visa in number of transactions, which will be a huge moment for India.

If you havent already used UPI, install your banks UPI app or any of the popular UPI apps like Google Pay, Phonepe, Paytm, and get started. As a user it is much simpler to pay/transfer using UPI. For merchants, UPI settlement is instant and with negligible costs. Compare this to Visa, Master, etc, where upto 2% of transaction or more is held back as fees and rest settled only after two days.

Recently SEBI put out a circular introducing UPI for retail IPO(Initial public offering) investors from January. IPO application process in India has improved significantly thanks to SEBI. Time taken to list from closing of an issue used to take 22 days in 2009, just 6 days now. Post implementation of UPI, it will further come down to just 3 days.

Currently to apply for an IPO, you can either use a physical application form along with signed cheque and submit to your stock broker, or you can do it online through ASBA (Applications supported by blocked amount). What ASBA does is to ensure that the IPO application amount remains blocked in the investors bank account and money only to the extent of stocks allotted in the issue is debited. The world digitally has evolved really fast around us in India, this method of applying for an IPO isnt conducive for mass retail participation.

With UPI for IPO, an investor will be able to fill in basic details into an online form along with the UPI ID with an intermediary, like your brokerage firm. All bids collected will be submitted to the exchange and validated with depositories where the demat account is held. Post this the sponsor bank will initiate a mandate request to authorise blocking of funds equivalent to the application amount and subsequent debit of funds in case of allotment. This is sent as an SMS and as a notification within the UPI mobile application. Investor would then have to login to the UPI app enter the UPI PIN and approve the request. Post allotment, amount to the extent not alloted for the application will get unblocked in the bank account. As simple as that.

IPOs of good companies historically have been the reason for growing investor base around the world. Be it Reliance Industries back in 1977 or Facebook in US in 2012. With UPI now for IPO and instant online demat account opening that can enable anyone to apply for IPO, hopefully good Indian companies will look at our capital markets for fundraising, get retail investors as shareholders, increase market participation, reduce dependence on foreign capital, and help in nation building.

(The author is the founder of online broker Zerodha)

Original Article

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