ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

I.

Inroduction

The Public Companies in India have the freedom to raise money from the market by issuing its shares. It may be in the form of private placement or public issue. When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public, it is called Initial Public Offer. This paves for listing of the shares of the unlisted company in the stock exchange. The shares are subscribed by the public through underwriters and syndicate members of the IPO. The IPO market in India is in a dynamic state. It keeps on changing very frequently. It is in a developing state since the liberalization of the Indian economy. The IPO market in India is on boom and a lot of companies are going for IPO to raise money from the market. The IPO market in India being a primary capital market is regulated by the Securities and Exchange Board of India. The IPO delivery system in India is not very smooth. The public can subscribe to the shares issued by the company through the underwriters or syndicate members of the issue. They have to make application in the paper form to underwriters or syndicate members. The whole procedure of IPO delivery in India was very cumbersome and time consuming. Due to the cumbersome and complicated procedures of IPO in India, it was very difficult for the retail investors to subscribe to the shares of the company. The Indian government as well as SEBI has been constantly trying to improve the IPO delivery system so that it will be easy for the retail investors to invest in the company. The SEBI has introduced the paper less system of IPO delivery in order to facilitate the subscription of the retail investors and to make the IPO delivery system very smooth. This paper less mechanism of IPO is known as Electronic IPO. The e-IPO is an application based and browser based software intended for use by Distributors of IPO and their end clients. The mechanism of e-IPO in India will be discussed in this paper by the author. The author will also discuss in brief the international perspective of the e-IPO in this paper with the case study of the infamous Facebook IPO.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

II.

Electronic IPO in India

The concept of e-IPO in India is not a new one. It can be traced back to the Chapter XI A of the SEBI (Disclosure and Investor Protection) Guidelines, 20001. A company going for public issue may offer the shares to public through online system of the stock exchanges provided it complies with the provisions enshrined in Chapter XI A of the DIP guidelines. However, the e-IPO mechanism was not very structured. SEBI (ICDR) Guidelines, 2009 also do not provide for the e-IPO mechanism. IPO in the electronic form was not mandatory for the unlisted companies going public for the first time. Mandatory e-IPO would have required amendment in the Companies Act, 1956. As a result, it was neglected by the government for a long period of time. However, the announcement made by the Honble Finance Minister in his speech while presenting the Union Budget 2012-2013 act as a catalyst which triggered the introduction of the additional Electronic IPO mechanism in India for the IPO delivery. The relevant portion of the speech of the Honble Finance Minister is reproduced below: ...in order to ensure that the public issuances route reaches out to larger number of retail investors spread across the country, it is proposed to use the nationwide broker network of stock exchanges for distributing IPOs in electronic form.2 In furtherance to the announcement made by the Honble Finance Minister in the Annual Budget, the Securities and Exchange Commission of India has constituted a Primary Market Advisory Market. After consulting with the market participants and stock exchanges, the committee made its recommendation. SEBI highlighted the need for such a measure in its memorandum titled, Reforms in the Primary Capital Market and came out with a proposed mechanism for E-IPOs. Following which further deliberations have resulted in the current additional mechanism of E-IPOs in India.

II.I Development of e-IPO mechanism in India

As we have already discussed in the above paragraphs that the concept of e-IPO is not new in India. The issuance of capital through online system of stock exchanges was permitted provided the conditions enshrined in Chapter XI A of the DIP Guidelines are fulfilled. Chapter XI A of the DIP Guidelines permitted the e-IPO mechanism. There were some conditions which need to be fulfilled by the issuing company before going for IPO through electronic mode. Some of the main provisions/conditions of Chapter XI A of the DIP Guidelines are discussed below.

1 2

Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1290060398656.pdf, last visited on March 30, 2013. Available at http://www.sebi.gov.in/cms/sebi_data/boardmeeting/1345799037077-a.pdf, last visited on March 30, 2013.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

1. Agreement with the Stock Exchange(s)3 The issuing company willing to go for IPO through electronic mode has to enter into an agreement with a stock exchange which has requisite system of on line offer of securities. The rights and obligations of both the parties should be disclosed in the agreement. The agreement should also provide for the mode dispute settlement procedure between the issuing company and the stock exchange(s).4 2. Appointment of Brokers5 Brokers which play a very important role in the trading in the secondary market are also expected to play that role in the primary market. The Stock Exchange(s) should appoint SEBI registered brokers who will be responsible for accepting applications from the investors and placing orders with the company.6 3. Appointment of Registrar to Issue7 A Registrar to the Issue should be appointed by the company who has electronic connectivity with the Stock Exchange(s) through which the securities are offered under the system. 4. Mode of Operation8 The applicants may apply for the subscription of shares either by making an application to the SEBI registered brokers of the stock exchange(s) through which the shares are offered under the online system9 or by sending a direct application to the registrar to issue in the duly filed form along with application money in the form of cheque or demand draft10. Furthermore, the brokers are required to submit the list of the valid applications received by them to the Registrar to the issue on daily basis.11 After the closure of issue and allotment of shares, the registrar will intimate the brokers about the fate of the applications received by them. The Brokers in turn have to intimate the applicants about their applications and have to return the application money within 3 days if the shares are not allotted to the applicants.12 However, the SEBI (DIP) Guidelines, 2000 were replaced by the SEBI (ICDR) Regulations, 2010. ICDR Regulation does not provide for the e-IPO mechanism. Hence, a separate regulation needs to

Clause XI A .2 of SEBI (DIP) Guidelines, 2000, Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1290060398656.pdf. 4 Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1290060398656.pdf, last visited on March 30, 2013. 5 Clause XI A.3 6 Ibid. 7 Clause XI A.4 of SEBI (DIP) Guidelines, 2000 8 Clause XI A.7 of SEBI (DIP) Guidelines, 2000 9 Clause XIA.7.3.a of SEBI (DIP) Guidelines, 2000 10 Clause XIA.7.3.b of SEBI (DIP) Guidelines, 2000 11 Clause XIA.7.10 of SEBI (DIP) Guidelines, 2000 12 Clause XIA.7.14 of SEBI (DIP) Guidelines, 2000

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE be enacted for the e-IPO mechanism. The e-IPO mechanism also requires some amendments to the Companies Act, 1956. In furtherance to the announcement made by the Honble Finance Minister in the Annual Budget, the Securities and Exchange Commission of India has constituted a Primary Market Advisory Market. After consulting with the market participants and stock exchanges, the committee made its recommendation. SEBI highlighted the need for such a measure in its memorandum titled, Reforms in the Primary Capital Market and came out with a proposed mechanism for E-IPOs. Following which further deliberations have resulted in the current additional mechanism of E-IPOs in India.

II.II e-IPO mechanism in India and Companies Act

The e-IPO mechanism which enables the investors to buy shares of the company going for IPO in the same manner as trading of shares happen in the secondary market. It will reduce the time and money which is required in the paper based IPO system.13 It will also encourage the retail investors living in the small towns to directly apply for the subscription of the shares of the companies in IPO.14 However, the road to the implementation of e-IPO mechanism in India is not very smooth. The implementation of e-IPO mechanism requires some amendments to the Companies Act, 1956. Section 73 (3) of the Companies Act15 which requires that the application money for the subscription of shares in an IPO should go to a separate bank account which is meant only for public issue has to be amended. Under the e-IPO mechanism, the application money will be routed through the brokers just like the secondary market and will not deposited in a separate bank account opened for the purpose of public issue. Hence, Section 73 (3) of the Companies Act has to be amended accordingly in order to enable the brokers under the e-IPO mechanism to accept the application money on behalf of the company.16 Furthermore, the implementation of the e-IPO mechanism will require another amendment to Companies Act dispensing with the requirements of an investor to agree in writing, since no application form submission is envisaged as the allotment will be in demat account.17

13

Available at http://m.economictimes.com/markets/regulation/sebi-may-ask-cos-planning-issues-of-rs-10-cr-orabove-to-give-an-e-ipo-option/articleshow/15486367.cms, last visited on March 31, 2013 14 Ibid. 15 Section 73 (3) of the Companies Act: All moneys received as aforesaid shall be kept in a separate bank account maintained with a Scheduled Bank 1[ until the permission has been granted, or where an appeal has been preferred against the refusal to grant such. permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in sub- section (2)]; and if default is made in complying with this subsection, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees. 16 Available at http://m.economictimes.com/markets/regulation/sebi-may-ask-cos-planning-issues-of-rs-10-cr-orabove-to-give-an-e-ipo-option/articleshow/15486367.cms, last visited on March 31, 2013. 17 Available at http://m.economictimes.com/markets/regulation/sebi-may-ask-cos-planning-issues-of-rs-10-cr-orabove-to-give-an-e-ipo-option/articleshow/15486367.cms, last visited on March 31, 2013.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE III.

Salient Features of the proposed e-IPO mechanism in India

The Securities and Exchange Board of India, in a Circular issued on October 4th 201218 has announced public issues in electronic form19 and use of nationwide broker network of Stock Exchanges20 for submitting application forms. This has been initiated to simplify the process of issuing Initial Public Offers (IPOs), lower their costs and to help companies reach more retail investors in small towns. The Securities and Exchange Board of India has discussed the initial mechanism of the e-IPO in India in its 7 Board Meetings which also include the market participants, representatives of the Stock Exchange, BRLMs and BTIs. Some of the most important features of the e-IPO mechanism which was discussed in the meetings of SEBI are discussed below: 1. Extension of e-IPO facility This is perhaps the most important features of the e-IPO mechanism in India. As already has been discussed in the above paragraphs that the concept of e-IPO is not new in India. It was permitted under the DIP guidelines also. However, there was not any proper mechanism for the e-IPO process. It was also mot mandatory. The companies had an option to go for e-IPO by complying with the provision enshrined in Chapter XI A of the DIP Guidelines.21 However, under the new proposal made by the SEBI, the e-IPO facility in India will be extended to 1038 locations where at least one of the clearing banks has a branch. This will be very beneficial for the investors as they can approach any of the brokers in these locations to submit their application forms. The investors in the paper based mechanism have to approach the underwriters and syndicate members and banks where ASBA accounts were opened in order to subscribe to the shares of the company. This problem was solved under the new mechanism.22 2. Applications Under the paper based mechanism, the application form can be received from the clearing banks or from the underwriters/syndicate members. However, under the e-IPO mechanism, the application forms for the subscription of shares can be downloaded from the websites of the stock exchanged itself. This will save the precious time and money of such investors who are living in some remote places.23

18

SEBI Circular CIR/CFD/14/2012 dt. October 04 th 2012. Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1349351021904.pdf, last visited on March 31, 2013. 19 Hereinafter, e-ipo 20 Hereinafter, Stock Ex. 21 Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1349351021904.pdf, last visited on March 31, 2013. 22 Ibid. 23 Ibid.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

3. Status of the Applications Under the e-IPO mechanism, the Stock Exchanged will facilitate the system in which the investors can view the status of their issue application on their website just like the secondary market transaction.24 4. Responsibility of the Brokers Under the e-IPO mechanism, the brokers will be responsible for uploading the bid on the exchange platform & for banking the cheque/handling ASBA applications. 5. Compensation to the Brokers The Brokers of the Stock Exchanges will be compensated by the issuer company for the responsibilities undertaken by them in the e-IPO mechanism. 6. Bankers to the Issue Under the e-IPO mechanism, the issuer company has to appoint least 5 clearing banks as Bankers to the Issue (BTIs) if issue size is less than Rs. 250 Cr., and latest 10 clearing banks as BTI if issue size is greater than 250Cr.25 7. ASBA Under the e-IPO mechanism, it will be mandatory for all ASBA banks to provide the facility in all their branches; Implementation of the same, in a phased manner to provide sufficient time for banks to upgrade their infrastructure.26 8. Online Payment The e-IPO mechanism will enable the investors to make payment online through various portals including ATM/Debit/Credit Card or Mobile card etc.27

24

Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1349351021904.pdf, last visited on March 31, 2013. 25 Ibid. 26 Ibid. 27 Available at http://www.financialexpress.com/news/ipo-investments-through-mobile-cards-/993389/1, last visited on March 31, 2013.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

IV.I

OF THE ISSUES IN ELECTRONIC FORM:

KEY FEATURES

SEBI

CIRCULAR DT./-

4/10/201228

ON PUBLIC

The Securities and Exchange Board of India has issued a circular29 which will regulate the public issues in the electronic form. It was issued in furtherance to the announcement made by the Honble Finance Minister during his budget speech and the recommendations of the Advisory Committee on the Reforms in the Primary Market. The circular was issued after the permission of the Ministry of Corporate Affairs as the e-IPO mechanism requires some amendments to the Companies Act, 1956. Enforceability: 1. The e-IPO mechanism is applicable for all the initial public offers for which the offer documents are filed with ROC on or after January 01, 2013. 2. It is mandatory for the unlisted companies making an issue of Rs.10 crore and above.30 Intended Advantages: 1. The e-IPO mechanism is an additional mechanism for investors to submit application forms using the nationwide broker network of Stock Exchanges. This means that the unlisted companies can also go for the traditional system of IPO in addition to the e-IPO mechanism. However, the e-IPO mechanism is mandatory for the companies making an issue of more than Rs. 10 crore.31 2. The applications can be submitted even to brokers who are not syndicate members to an issue, and the applications submitted may be ASBA as well as non-ASBA.32 Application forms: 1. Application forms for the subscription of shares of the unlisted company making IPO can be downloaded directly from the websites of the stock exchanges or the terminals of the brokers.33 2. The e-IPO mechanism will be extended to more than 1000 locations that are part of the nationwide broker network of the Stock Exchanges and where there is a presence of the brokers terminals. The number of the terminals of the brokers will be increased in a phased manner.34 First phase: Around four hundred (400) broker centres by January 01, 2013 Second phase: Remainder by March 01, 2013

28

CIR/CFD/14/2012, available on at www.sebi.gov.in under the categories Legal Framework and Issues and Listing. 29 Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1349351021904.pdf, last visited on March 31, 2013. 30 Ibid. 31 Ibid. 32 Ibid. 33 Ibid. 34 Ibid.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE Responsibilities of the Stock Exchanges: 1. To ensure that the forms are pre-filled with the information relating to price-band. 2. The website contains regularly updated details of locations, such as; the name of the broker, contact details viz. name of the contact person, postal address, telephone number, e-mail address of the broker, etc. 35 3. Location where the application forms shall be collected to be disclosed by the Stock Exchanges on their websites latest by 18th December for the first phase and 15th February 2013 for the second phase.36 Disclosures and Compliances 1. Merchant Bankers to ensure that appropriate disclosures in the offer document. 2. All intermediaries have been advised to take necessary steps to ensure IV.II THE DETAILS OF THE MECHANISM AS SPECIFIED IN ANNEXURE A OF THE CIRCULAR:37 Sr. Step 1 Activity under the Points to be considered mechanism Investor submits the form Submission may be made to any registered broker of the ( to any registered broker stock exchange, indicating payment mode non-syndicate member) and Distinguishing mechanism to identify syndicate and nonbroker uploads the bid on syndicate members, to be provided by the stock exchange. the stock exchange Facility for investors to check status of their applications online. Accepted applications to be stamped by the broker and uploaded on the Stock-Ex websites. Broker to be responsible for and liable in the even of failure to, uploading the bid on the Stock Exchange platform, banking the cheque / submitting the ASBA form to SCSB, etc Action to be taken by the Stock Exs. against defaulting brokers Broker deposits the cheque, prepares electronic schedule and sends it to Banker to the Issue Bankers to the Issue (BTI), with branches in a broker centre, to ensure that at least one of its branches accepts cheques. Brokers to deposit the cheque in any bank branch of the

Step 2 (Applicable only for non-ASBA applications)

35

Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1349351021904.pdf, last visited on March 31, 2013. 36 Ibid. 37 Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1349351021904.pdf, last visited on March 31,2013.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE collecting bank in the broker centre Brokers to update the electronic schedule (containing application details including the application amount) as downloaded from Stock Ex platform and send it to local branch of the collecting bank. Brokers to retain all physical applications initially and send it to Registrar to Issue (RTA or Registrar) after 6 months. Broker to forward a schedule (containing application number and amount) with application forms to the branch named for ASBA of the respective self certified syndicate banks (SCSBs) for blocking of fund Local branch of the collecting bank/SCSB to update the schedule based on cheque clearance/ fund blocking and send it to controlling branch Controlling branch to consolidate the e-schedule of all branches, reconcile the amount received/blocked with the bank balance and send the consolidated schedule to the RTA along with Final certificate.

Step 2A (applicable only incase of ASBA applications) Step 3

Broker forwards a schedule along with application form to respective ASBA Branch

Step 4

Step 5

Local Branch marks for cheque return/block funds, updates eschedule and sends it to the controlling branch Controlling branch consolidates the eschedule of all branches and sends it to the RTA RTA follows the existing process for other modes. RTA,

To reconcile the schedules received from the bank with the Stock Exchange data. Calculate the compensation payable to each broker and share the details with the Stock Ex. May request for physical application forms directly from Brokers/SCSBs under exceptional circumstances such as discrepancy in PAN/ demat account number/client ID, investor complaint, etc. Will follow the usual process of reconciliation, allotment, refund, etc

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

V.

Process of e-IPO Mechanism

APPLICANTS

e-IPO Website

Payment INTERNET BILL PAYMENT

Payment PSS INTERNET AND BILL PAYMENT

e-IPO SERVICE PROVIDER

PAYMENT MATCHING

Invalid Application REFUND

IPO RECEIVING BANK

IPO PROCESS & BALLOTING Successful SHARE CERTIFICATES Not Successful REFUND

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

VI.

e-IPO Mechanism: An International Perspective

1. USA The general public in the United States can subscribe to the shares of the company going for IPO though the underwriters and syndicate members to the issue. The company going for IPO in the United States gives a list of syndicate members and underwriters in its prospectus who are responsible for the subscription. Moreover, the public can also subscribe the shares online through any broker who are also the syndicate members of the issue. They can subscribe the shares just like shares of the listed companies are traded in the secondary market. E-Trade, one of the largest online broking firms of the USA was the syndicate member of the Facebook IPO to facilitate the online trading of the shares of the Facebook.38 The details of the e-IPO mechanism and its loopholes are discussed in the case study of Facebook IPO which is discussed in the later part of this paper. 2. Hongkong The e-IPO mechanism in Hongkong was implemented in August 2012. The registered persons/brokers using the internet are allowed to collect the applications for the subscription of securities in an IPO from the prospective investors. The Securities and Forward Commission of Hongkong came up with the Guidelines for e-IPO mechanism in August 2012. The Guidelines are intended to provide guidance to those registered persons who use the Internet to collect applications from their clients or the public for securities in an initial public offering (IPO).39 Some of the main features of the e-IPO mechanism as provided in the guideline issued by the Securities and Forward Commission of Hongkong are discussed below. i. ii. Many Market Participants are allowed to offer e-IPO service to the public. These market participants are known as e-IPOe service providers. It includes brokers, banks etc.40 The e-IPO service providers are free to make their own arrangement for the collection of applications from their client or public. They have also given autonomy to determine the mode for payment of application amount. They can also set up their own websites for this purpose.41

38

Available at http://business.time.com/2012/05/08/facebooks-ipo-is-now-available-for-e-trade-retail-investors/, last visited on March 31, 2013. 39 Available at http://www.sfc.hk/edistributionWeb/gateway/EN/news-andannouncements/news/doc?refNo=00PR92 40 Ibid. 41 Ibid.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE iii. All the application information will be arranged by the e-IPO service providers in data files in accordance with the standard data file format specified by the Federation of Share Registrars Limited either electronically or manually.42 The e-IPO service providers have the responsibility to submit the consolidated application forms alongwith the application money to the Securities and Forward Commission of Hongkong.43

iv.

3. Pakistan The Securities and Exchange Commission of Pakistan has also announced the introduction of the e-IPO mechanism in the primary market. Under this mechanism, the shares during the IPO can be subscribed through the brokers just like the trading of shares of the listed companies in the Secondary Market. The e-IPO mechanism is based on the Indian model.44 The e-IPO mechanism in Pakistan will be available to the investors in addition to the normal IPO mechanism. However, in the due course of the time, it will replace the traditional IPO mechanism completely.45

VI.I Facebook IPO: A Case Study

The Initial Public Offer was made by the Social Networking giant on May 18, 2012.46 Morgan Stanley was appointed as the underwriter of the issue and the shares were listed on NASDAQ. The Facebook IPO was one of the biggest in technology, and the biggest in Internet history, with a peak market capitalization of over $104 billion. The shares of Facebook were to be issued through electronic mode. The retail investors could also subscribe to the shares through E-Trade which was one of the syndicate members of the issue.47 This was one of the most hyped public issues of the century. NASDAQ had a tough fight with New York Stock Exchange in order to get the shares listed on it. Morgan Stanley, who was the underwriter of the issue, was also considering the issue as a golden feather in its cap. However, the incidents which took place on May 18, 2012 tell some different stories. The IPO which was supposed to open at 11 AM got delayed by half an hour due to some technical problem. The opening price of the IPO was to be determined by call auction mechanism in which the underwriter has to sell shares in order to determine the price of the shares. Problem occurred at 11.11 AM when the underwriter Morgan Stanley completed the sale of 421 million shares to determine the opening price of the shares of the Facebook through call auction mechanism.48
42 43

Ibid. Supra note 39. 44 Available at http://tribune.com.pk/story/397930/secp-launches-e-subscription-service/, last visited on March 31, 2013. 45 Ibid. 46 Available at http://en.wikipedia.org/wiki/Facebook_IPO, last visited on March 30, 2013. 47 Available at http://business.time.com/2012/05/08/facebooks-ipo-is-now-available-for-e-trade-retail-investors/, last visited on March 30, 2013. 48 Available at http://money.cnn.com/2012/05/21/markets/facebook-nasdaq/index.htm, last visited on March 30, 2013

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE The problem occurred due to the crashing of the software of the NASDAQ. Its software for IPOs allows investors to cancel or update details of orders until the auction runs. Trade requests received during the 5 milliseconds it took to operate the auction disturbed the process, leading to an imbalance of buys and sells and sending the program into a loop.49 About 30 million shares were submitted into the opening auction between 11:11 am and 11:30 am which formed 1% of the total volume of trade that happened on the first day. Buy and sell requests that should have been filled in the opening auction, based on the exchanges rules, werent filled while cancellations orders for other trade requests were ignored.50 These all happened because of the crashing of the software of the NASDAQ. 51 The actual opening price of the shares of Facebook could not be determined through call auction mechanism in pre-opening trading session. When the issue was finally opened at 11:30 am after the manual intervention of NASDAQ, the highest bid or price at which the market participants were willing to purchase shares, was $ 42.99 while the lowest offer to sell was $42.50. This means that sellers were asking fewer prices for the shares and buyers were ready to pay more.52 The technical problem occurred due to the crashing of the software of NASDAQ created confusion in the market. Initially, the price of the shares rose to an unexpected level of $ 45 but fell down to $ 38.23 at the closing bell.53 The price of the shares went down further in the subsequent days. Though, experts are holding a number of other factors in addition to the technical problem for the failure of Facebook IPO, but we cannot ignore the role of software crash which acts as a catalyst in its failure. The software of NASDAQ was being used after thousand of trial test for the call auction mechanism. Initial Public Offering through electronic mode is not new for the US Stock Exchanges, and then also it had to face technical problems which led to the failure of the IPO. The Facebook Crisis should be a case study for the Indian Stock Exchanges which will be going for IPO through electronic mode after the clearance of e-IPO mechanism from the Securities and Exchange Board of India. Another lesson which the Indian Stock Exchanges should learn from the Facebook Crisis is the role of retail investors in the IPO. The e-IPO mechanism is introduced in India in order to facilitate the retail investors to subscribe to the IPO of the unlisted company. Retail Investors cannot be treated at par with the syndicate members. A separate mechanism should be introduced for the retail investors to invest in the shares of the company.

49

Available at http://www.bloomberg.com/news/2012-05-20/nasdaq-ceo-says-poor-design-in-ipo-softwaredelayedfacebook.html, last visited on March 30, 2013. 50 Ibid. 51 Available at http://www.bloomberg.com/news/2012-05-08/facebook-s-retail-investors-seen-missing-day-oneiposurgetech.html, last visited on March 30, 2013. 52 Ibid. 53 Available at http://www.bloomberg.com/news/2012-05-20/nasdaq-ceo-says-poor-design-in-ipo-softwaredelayedfacebook.html,last visited on March 30, 2013.

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE

VII.

CONCLUSION

The circular clearly establishes that the current E-IPO provisions would apply in addition to the existing regulations under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 200954 pertaining to requirements on companies making Initial Public Offers. E-IPO however, appears to be an appropriate measure if one considers the rapidly changing nature of Capital Markets, the increased influence of technology and how this additional mechanism intends to marry the two aspects to facilitate the development of capital markets in India. SEBI has increased the ASBA facility, 55and this also necessarily means an increase in the reach of the IPO process making it much simpler for investors to apply in IPOs using the ASBA process. Under the ASBA there are no provisions to undertake any checks or instruments for clearing. This results in the whole IPO process, after closure to listing, getting reduced by six to eight days, making it possible to start having listing in three-four days after the issue closure. This is beneficial both for the issuer as well as for the investor because one would not be taking a call on the market for that much longer period of time. The e-IPO mechanism in India was introduced on order to reduce the cost and time which is involved in the Initial Public Offer. It was also introduced with an aim to enable more retail investors to invest in the shares of the company. It will be cost effective as it will save paper, printing and other costs of the application process. It will also be beneficial for the investors as they can now invest through the registered brokers just like they trade shares of a listed company in the secondary market. Furthermore, the net of the IPO will be spread over a large area due to the involvement of the registered brokers. In the traditional IPO mechanism, only 10% of the total brokers are involved. After the implementation of the e-IPO mechanism, the difference between the trading in the primary and secondary capital market will be narrowed down. However, the Stock Exchanges and SEBI should adopt a very cautious approach when it comes to the e-IPO mechanism. We should not forget the Facebook IPO crisis which failed because of the technical problem in pre-open session. The Stock Exchanges should ensure that they have the required technical expertise to facilitate the online trading. The SEBI should also take a close look on the stock exchanges in this regard.

54 55

See, Chapter s III, V & VI of the ICDR http://www.sebi.gov.in/acts/icdrreg09.pdf See, http://www.sebi.gov.in/cms/sebi_data/attachdocs/1348570443904.pdf

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ELECTRONIC IPO: A NATIONAL AND INTERNATIONAL PERSPETIVE VIII. REFERENCES Articles Referred
Parekh Deepak, IPO Market in India, Bloomsburry Publication.

Circulars
CIR/CFD/14/2012. Available http://www.sebi.gov.in/cms/sebi_data/attachdocs/1348570443904.pdf at

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