• MARCH 21, 2000

IPO buying online - Pros outweigh Cons

The National stock exchange and the Bombay stock exchange are both mooting the proposal of buying into shares of IPOs online through brokers as it is for secondary market transactions . However till the system gets in place there are many issues which need to be tackled of buying IPO shares online.

From the brokers' point of view the negatives are: as the number of shares applied to by retail investors is small this may not be economical for the broker to execute and the risk of default lies with the broker as the investor will make payment only on allotment.

Another big risk is that if investors default on payment what happens to the company's expansion plans for which it is raising funds. SEBI will need to clarify whether brokers will underwrite the issues if such a thing happens. Also many brokers may not opt for online application of IPOs unless there is a margin money provision as a percentage of the application amount.

Rural investors who do have access to broker terminals may find it difficult to apply online. However this will get easier once web based trading expands into rural areas. As televisions have already penetrated into the rural market, once access of the internet through television screens starts this segment will get a fillip.

The advantages on the online system however outweigh the negatives. The biggest being transactions will be speedier as an investor you do not have to wait to get the forms and physically go to the issuing company's bank to apply for the shares. Hence it would save a lot of time.

Other positives of the new system are that there would be no refund problems and no blocking of funds as is happening right now. Currently it takes around 30 days to get allotment of IPOs while in the new system this shall be cut down to just a week.

This process is expected to reduce speculation to a large extent as this is online and would be more transparent. Also incase, SEBI decides on margin money requirements this would lead to more genuine buying. Incase of an IPO with an option of book building the pricing would also be more realistic, than currently.

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