Guide for UPI payment in IPO application for investors

UPI (Unified Payments Interface) payment for IPOs is set to become reality in 2019. Following SEBI’s notified reforms for the primary market last year, Xelpmoc Design and Tech will become India’s first primary market issue to accept UPI payment for IPO, although there appear to be implementation issues with intermediaries as of now. Here is a quick assessment of the latest payment method of UPI for IPO and how it will change your life, if at all.

What is UPI?

UPI was introduced in April 2016 by the National Payments Corporation of India (NPCI) as a mobile-based interface to facilitate cashless transactions from one bank account to another. It works on banks’ existing IMPS (Immediate Payments Service) architecture but allows users to transfer funds without logging in their respective netbanking accounts. All a user needs is a UPI ID which is pretty much like an email ID (example name@bankname). It is essentially a layer on top of the IMPS interface and thus, there are benefits like instant transfers and 24 hour availability which other transfer mechanisms such as NEFT lack.

UPI for IPO investors

Last year, capital market regulator SEBI allowed UPI payments to be considered valid for retail investors (defined as IPO applications smaller than INR200,000) for all upcoming IPOs with effect from 1 January 2019. The idea behind the move is to further trim the timeframe between closing of an IPO and stock market listing from the current six days to just three days.

UPI IPO payment process explained

From an investor’s point of view, the UPI payment process is quite simple and doesn’t need many changes from the existing process. Currently investors need to have a demat account and a bank account and the only new thing required for UPI payments is the UPI ID. Just install any popular UPI application for mobile phones such as PayTM, Freecharge, Google Pay or use one from your bank to create UPI ID.

Once equipped with UPI ID, an investor needs to submit an online form containing vital information including UPI ID, demat account details and bid details to the intermediary dealing in the particular IPO. Like ASBA forms, this form is available on the websites of stock exchanges, banks, and brokers. Once the application is submitted, it goes to stock exchanges for validation of demat accounts with CDSL or NSDL. Following successful validation of these details, the exchanges share UPI details with the sponsor bank which in turn initiates a mandate request authorizing blocking of funds (see image below). This request needs to be authorized by investor through the UPI mobile application.

The subsequent steps involving creation of final bid book and registrars’ role in allotment remain unchanged. Here is a graphical representation of the entire application flow:

UPI payment for IPO to be implemented in three phases

Since this is a brand new change in the IPO application for retail investors, SEBI has decided to implement this in three phases:

Phase I – Starting 1 January 2019, the UPI mechanism will be made available to retail investors but the existing process of submitting physical applications from intermediaries to banks will also continue. IPO listing timeline will continue to be T+6 days. This phase will remain in place for three months but can extend to accommodate at least five mainboard IPOs.

Update to Phase I – Pursuant to a new SEBI circular, the timeline for Phase I has been increased by three months and thus, the same will remain active until 30 June 2019. This change doesn’t effect Phase II and Phase III.

Phase II – In the subsequent phase, UPI payment for IPO will be made mandatory for retail investors and the movement of physical forms for blocking of funds will be discontinued. Nevertheless, the gap between IPO closing and listings will remain T+6 days.

Phase III – In the final stage, the gap between IPO closing and listing will be reduced to three days. As mentioned above, it could happen as soon as April 2019 if five or more mainboard IPOs are launched in the final quarter of FY 2018-19.

Implementation challenges – teething problems

At the time of writing this article, we checked with several brokers including Zerodha, Upstox, Indiabulls and ICICIdirect and there were no details regarding UPI payments for IPOs in their trading interfaces. Similarly, internet banking dashboards of HDFC Bank, Axis Bank, SBI were silent on this aspect. Nevertheless, stock exchanges have prepared their platforms to facilitate UPI payments.

What does UPI for IPO mean for retail investors?

If you are a small investor, there is absolutely no need to panic as the implementation of UPI for IPO application is not going to hamper the existing ASBA process. The only thing going out of the process is the physical movement of bid-cum-application forms from intermediaries (brokers) to banks.

SEBI’s note for UPI payments 

clearly states that investors will still be able to submit physical IPO applications at branches of Self-Certified Syndicate Banks (SCSBs). At the same time, the current facility of placing IPO applications online through trading, demat and bank accounts through ASBA route will continue.

Watch an IPO application process with UPI on Youtube