SEBI proposes IPO listings in 3 days flat

For investors in the IPO market, it has been a rocky ride over the years. In the nineties, an investment in an IPO would mean lots of uncertainties. The entire process of applying for an IPO, getting the allotment, and getting the share certificates took about 2 months to 3 months. From that point, the regulators have been gradually bringing it down. In 2018, the SEBI mandated linking ASBA mandates to UPI and reduced the process time to 6 days. That means, the IPO must list on the stock exchanges by the sixth working day from the closure of the IPO.

Now, after a gap of 5 years, SEBI wants to take the IPO market to the next level. It wants companies to complete the entire process of IPO allotment and listing on the stock exchanges by T+3 day, i.e., in 6 days from the date of closure of the IPO. What will be the implications of this move and what would be the impact?

Here is how SEBI explains the shift to T+3 for IPO

As per SEBI, the necessary stress tests have been done in consultation with the market infrastructure institutions and T+3 listing for IPOs looks to be perfectly feasible. In short, the  current listing period of 6 days would be reduced to just 3 days, a move that is expected to benefit both issuers and investors. But what would be the benefits to both the parties? According to SEBI consultation paper, the reduction in timelines from 6 days post closure of the IPO to 3 days post closure of the IPO, will enable issuers to gain faster access to the capital raised. They do not have to wait for a long time to be able to put these funds into action. That would also mean that, investors will have the opportunity to obtain early credit and liquidity for their investments.

That is a big shift from the last big change In November 2018. Back then, SEBI had  introduced the Unified Payment Interface (UPI) as an additional payment mechanism, along with the Application Supported by Blocked Amount (ASBA) system, for retail investors. This had brought in sharply higher inefficiency for the IPO allotment system as the listing timeline was crunched to just 6 days  following the closure of an IPO. In the latest move, the route has been paved cut the listing time line further from T+6 days to just T+3 days.

The SEBI consultation paper is up for comments and recommends a decrease in the time period between the date of issue closure and the date of share listing through public offerings. The proposed change would reduce the listing timeline to just 3 days (T+3) instead of the current 6 days. That means, the IPO issuing company has to get listed within 3 days of the last day of the IPO.

Will the new system add value?

That is hard to say. Prima facie, the new rules should help to bring down the time to listing and also make funds available quickly to the issuers and the investors. However, it also comes with a price since it is going to put a lot of pressure on the existing infrastructure. It remains to be seen if the logical ecosystem comprising of brokers, sub-brokers, distributors, and registrars are able to coordinate such a massive activity in just 3 days. That means, the task of finalizing basis of allotment, managing refunds and the demat credits has to be completed in just 3 days flat. This will only be more complicated for larger sized issues. We have seen in the case of ONGC in 2004, how allotments got into a big mess and the regulator and big institutions had to intervene to bail out the registrars back then.

The current T+6 system is good enough and does not need too much of a makeover. It is running smoothly and is sufficient for the existing demand and appetite for IPOs. The market is not too clear if the current downstream infrastructure can really handle the additional pressure that t+3 would impose. It, perhaps, calls for more deliberation.

This move by SEBI follows extensive back-testing and simulations conducted by all stakeholders involved in the IPO process, including stock exchanges, sponsor banks, the National Payments Corporation of India (NPCI), depositories, and registrars. These tests aimed to evaluate the impact and feasibility of various key activities associated with public offerings.