Friday, March 6, 2015

Application Supported by Blocked Amount (ASBA)

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Investment on Shares
The traditional process of applying in Initial Public Offers (IPO), Follow-on Public Offers (FPO), Right Issues, etc. (i.e., investing in shares) is to use cheque as a mode of payment and submitting applications.

It has some problems associated -
  • Investors have to pay the entire fee upfront (at the time of bidding for shares)
  • Refunds (in case bidding failed) through cheques usually take up to 45 days.

Applications Supported by Blocked Amount (ASBA)
SEBI (capital market regulator) introduced ASBA in September, 2008 in Indian Capital market to facilitate the application process for shares to benefit the investors, by removing the above problems.

ASBA is an application to buy shares, where investors authorize the bank (mediates the process) to block the application money in his bank account. Investors cannot withdraw the blocked amount, until the whole process is over.

  • If the investor is selected for share (means he is allotted shares / bidding successful), then his blocked amount will be automatically debited from his account, and an equivalent share will be credited in his Demat Account.
  • If the investor is not selected for share (means his bidding is unsuccessful), then the blocked amount will be unblocked, and he can withdraw that amount as per his wish.
Note that ASBA solved the above two problems.

Interests in the Blocked Amount
Under ASBA, the blocked amount will continue to earn interest during the application processing period, if held in an interest bearing account (like savings account, etc.). Bank will mark a lien on the deposit, which will be removed immediately after the allotment process is completed.

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