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ASBA - Application Supported by Blocked Amount

In January 2008 Reliance Power came out with Initial Public Offer (IPO) aggregating to Rs 11,563 crores. The issue was oversubscribed by more than 73 times and generated demand exceeding Rs 750,000 crores. Reliance Power collected application money of Rs 110,832 crores and had to refund the excess application money of Rs 99,269 crores. The entire process of application to refund took minimum 15 days. Assuming overnight interest rates of 6%, float income on the excess application money amounted to approx Rs 16 crores per day, i.e. total of Rs 240 crores for the 15 days period! That is a huge sum of money and is a leakage from investor’s perspective, the spoils of which is shared between the Issuer and the Bankers to the IPO.

How could you improve the system to make it fair to the investors? What if the investors don’t need to pay the application money upfront without knowing exactly how many shares would be allotted to them? What if the investors can pay money post allotment for the exact number of shares allotted to them and there is no requirement of refund? What if the money never leaves the investors account and he continues to earn interest, until final share allotment? What if it was possible to shorten the IPO timeline?

ASBA is the answer to all these questions.

What exactly is ASBA?

ASBA means Applications Supported by Blocked Amount (ASBA). Simply put, ASBA is a new method for making payment for IPO, right issues and Follow on public offers (FPO) made through book building route. Traditionally investors had to make payment by cheque / draft for the application amount. ASBA is an additional payment mode introduced by India's capital market regulator SEBI in September 2008, with a view to make the existing public issue process more efficient.

How is it different?

In normal payment methods such as cheque and draft, investor has to make the payment of the full application amount upfront. Depending on the level of oversubscription, shares are allotted and excess amount paid on application is refunded. The whole process typically takes 12 to 15 days.

When payment is done through ASBA, application money doesn’t leave the bank account of the investor at the time of application, but is only blocked, i.e. even though the amount remains in the account and continues to earn interest, same cannot be withdrawn or otherwise utilized by the accountholder. Once issue is closed and basis of allotment finalized, only required amount for the shares allotted is debited from the account and balance amount is free for utilization.

Advantages of ASBA

Applying through ASBA process has the following advantages:
  • Investor need not pay the application money upfront. Investor’s bank account is blocked to the extent of the application money, thus investor continue to earn interest on application money. 
  • No need to bother about refunds, as in ASBA only an amount proportionate to the securities allotted is taken from the bank account when the application is selected for allotment after the basis of allotment is finalized. 
  • Since the amount is available in the account, it is considered for calculation of the Monthly Average Balance (MAB)
  • ASBA bids can be withdrawn during the bidding period and even after the bid closure period but prior to the finalization of basis of allotment.
However please note there is no advantage as far as allotment is concerned. The chance of getting allotment is same for all the applicants whether application is made through ASBA or non-ASBA.

Why ASBA?

ASBA was introduced with a view to shorten the IPO timeline. Traditional IPO payment methods such as cheques and drafts entails payment of money upfront by the investor and refund of the excess money by the company depending on the final allotment. However under ASBA investors pay for the exact number of shares allotted and there is no requirement of refund.

Who can use ASBA?

ASBA facility can be used by any category of investors, viz. Qualified Institutional Buyers (QIB), High Networth Individuals (HNIs) and Retail investors. In April 2011, SEBI made ASBA mandatory for all non-retail investors (HNIs and QIBs) investing in public and rights issues, while it is optional for the Retail investors.

Retail investor can apply either through ASBA or through existing system of payment through cheque. If an applicant applies through both, ASBA as well as non-ASBA then both the applications having the same PAN, will be treated as multiple application and hence will be rejected.

What is SCSB?

Self certified Syndicate Bank (SCSB) is a bank which is recognized as a bank capable of providing ASBA services to investors. ASBA applications can be submitted only to SCSB with which the investor is holding the bank account. In case investor does not have an account with any of the SCSBs, then he cannot make use of the ASBA facility.

ASBA process in brief:
  1. An investor shall submit an ASBA physically or electronically through the internet banking facility, to the SCSB with whom the bank account to be blocked, is maintained. 
  2. SCSB shall then block the application money in the bank account specified in the ASBA. The application money shall remain blocked in the bank account till finalization of the basis of allotment. 
  3. The application data shall thereafter be uploaded by the SCSB in the electronic bidding system through a web enabled interface provided by the Stock Exchanges. 
  4. Once the basis of allotment is finalized, the Registrar to the Issue shall send an appropriate request to the SCSB for unblocking the relevant bank accounts and for transferring the requisite amount to the issuer’s account. 
  5. In case of withdrawal/ failure of the issue, the amount shall be unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.
Way forward

Ultimate objective for SEBI is to make the IPO process smooth and hassle free for the investors. Towards this end ASBA brings significant relief. SEBI would gradually move to make ASBA compulsory for all set of investors. This would enable to compress the issue timelines significantly. We could see issue timelines shrink to 3-4 days from the current 12-15 days. We could also see SEBI moving towards e-IPO, wherein there would be no paper application involved and applying for IPO would be akin to buying any other share from the broker.

Enhancement of Section 80C Deduction Limit from Rs 100,000 to Rs 150,000

Limit for deduction under Section 80C of the Income Tax Act, 1961 has been enhanced from Rs 100,000 to Rs 150,000 in the Union Budget 2014. Enhanced deduction is applicable from Assessment Year 2015-16 corresponding to Financial Year 2014-15. Potential tax savings will be from Rs 5,000 to Rs 15,000 (excluding education cess and surcharge) depending on the applicable income tax rate of the assessee.

Section 80C is an important tax planning tool available to Individuals and Hindu Undivided Family (HUF). Not only will it benefit people with reduced tax liability but also force increased savings. Hence it is advisable to ensure maximum possible deduction under this section is availed by the assessee while computing income tax liability. Please see Saving Income Tax through Smart Tax Planning – Guide to Section 80C Deductions to understand the various eligible investments and payments allowed for this deduction.

Income Tax Rates for AY 2015-16 (FY 2014-15) - UNION BUDGET

Income Tax Rates applicable for Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI) in India as proposed in the Union Budget for FY 2014-15 is as under:




Assessment Year 2015-16, Relevant to Financial Year 2014-15 

For Individuals below 60 years age (including Woman Assessees):
Income
Tax Rate
Upto 250,000
Nil
250,000 to 500,000
10% of the amount exceeding 250,000
500,000 to 1,000,000
Rs.25,000 + 20% of the amount exceeding 500,000
1,000,000 & above
Rs.125,000 + 30% of the amount exceeding 1,000,000

For Individuals aged 60 years and above but below 80 years (Senior Citizen):
Income
Tax Rate
Upto 300,000
Nil
300,000 to 500,000
10% of the amount exceeding 300,000
500,000 to 1,000,000
Rs.20,000 + 20% of the amount exceeding 500,000
1,000,000 & above
Rs.120,000 + 30% of the amount exceeding 1,000,000

For Individuals aged 80 years and above (Very Senior Citizen):
Income
Tax Rate
Upto 500,000
Nil
500,000 to 1,000,000
20% of the amount exceeding 500,000
1,000,000 & above
Rs.100,000 + 30% of the amount exceeding 1,000,000

Tax Credit: Finance Bill 2014 is silent on the Section 87A, which was introduced by Finance Bill 2013 with effect from AY 2014-15 and provides a rebate of Rs. 2,000 for every person whose income doesn’t exceed Rs. 500,000. Hence this provision continues for AY 2015-16 as well.

Surcharge on Income Tax: 10% of the Income Tax payable, in case the total taxable income exceeds Rs.10,000,000. Surcharge shall not exceed the amount of income that exceeds Rs.10,000,000.

Education Cess: 3% of Income Tax plus Surcharge

Note: The above Income Tax rates have been proposed in the Union Budget for FY 2014-15 presented by the NDA government. These rates supersedes the proposal in the Vote On Account presented by the erstwhile UPA government pending Lok Sabha elections. 

Motor Third Party Liability Insurance - Premium Rates Increase

As we have seen in “Understanding Motor Insurance Premium”, Third Party Liability insurance is mandatory for all vehicles plying on public roads in India. Motor vehicles can cause bodily injury to third parties or cause damage to public or private property. To cover this risk, Liability Only Policy is compulsorily required by law. This policy covers Third Party Liability for bodily injury and/ or death and Property Damage. Personal Accident Cover for Owner-Driver is also included.

The premium cost for Third Party Risk cover is decided by the Insurance Regulatory and Development Agency (IRDA) and is the same for all companies providing car insurance in India. Every year, IRDA calculates fresh third-party motor premiums depending on parameters such as average claim amounts, frequency of claims, expenses involved in servicing the motor third-party business and cost of inflation index for the year of review. Accordingly IRDA issued a circular in last week of March 2014 to increase the third-party premium rates for motor vehicles for financial year 2014-15 with effect from 1st April 2014. 

Third Party liability insurance premium rates for Private Cars before and after revision were as under:

Private Cars
Third Party Liability Premium (Rs)
For 2014-15
For 2013-14
Increase (%)
Not exceeding 1000 cc
1,129
941
20%
Exceeding 1000 cc but not exceeding 1500 cc
1,332
1,110
20%
Exceeding 1500 cc
4,109
3,424
20%
                           
Third Party liability insurance premium rates for Two Wheelers before and after revision were as under:

Two Wheelers
Third Party Liability Premium (Rs)
For 2014-15
For 2013-14
Increase (%)
Not exceeding 75 cc
455
414
10%
Exceeding 75 cc but not exceeding 150 cc
464
422
10%
Exceeding 150 cc but not exceeding 350 cc
462
420
10%
Exceeding 350 cc
884
804
10%



Understanding Motor Insurance Premium

Motor Insurance / Auto Insurance / Car Insurance is a subject we normally struggle with every year at the time of annual renewal of car insurance policy. Proper understanding of various terms and how premium is determined will not only enable us to understand different component of the insurance premium but also let us negotiate better deal.

Motor Insurance policies are broadly of two types:

A.    Liability Only Policy: Motor Insurance policy is required to be taken for all motor vehicles plying on road. Motor vehicles can cause bodily injury to third parties or cause damage to public or private property. To cover this risk, Liability Only Policy is compulsorily required by law. This policy covers Third Party Liability for bodily injury and/ or death and Property Damage. Personal Accident Cover for Owner-Driver is also included.

B.    Package Policy: Also referred to as Comprehensive Policy, it covers loss or damage to the vehicle insured in addition to (1) above. It is more prudent to take a Package Policy which would give a wider cover, including cover for your vehicle. Majority of the motor insurance policies are package policies. Premium for Package policy can be arrived at by adding Own Damage Premium to premium for Liability Only Policy.

Premium for Liability Only Policy

Third Party Liability insurance is mandatory for all vehicles plying on public roads in India. This covers Liability for injuries and damages to others that you are responsible for. The premium cost for Third Party Risk cover is decided by the Insurance Regulatory and Development Agency (IRDA) and is the same for all companies providing car insurance in India.

Premium for Liability Only Policy is sum of the following:

1.     Basic Third Party Liability: Rates applicable are as follows:

Private cars
Third Party Premium from 1-Apr-2014 (Rs)
Not exceeding 1000 cc
1,129
Exceeding 1000 cc but not exceeding 1500 cc
1,332
Exceeding 1500 cc
4,109

It is to be noted that the Third Party Premium rates were revised by IRDA with effect from 1st April 2014. Rates applicable prior to revision was as below:

Private cars
Third Party Premium from 1-Apr-2013 (Rs)
Not exceeding 1000 cc
941
Exceeding 1000 cc but not exceeding 1500 cc
1,110
Exceeding 1500 cc
3,424

2.     Compulsory Personal Accident Cover for Owner-Driver: Rs 100 is charged and Sum Insured is Rs 2 lakhs.

3.     Optional Personal Accident Cover for persons other than Owner-Driver: Rs 100 is charged and Sum insured is Rs 2 lakhs, for unnamed passengers as per the registered carrying capacity of the vehicle.

4.     Legal liability for paid driver: Rs 50 is charged

Premium for Package Policy

Premium for Package Policy is arrived at by adding Own Damage Premium to premium for Liability Only Policy.

Own Damage Premium: Calculation of Own Damage Premium depends on the factors such as Insured’s Declared Value (IDV), Tariff Rate, No Claim Bonus and Discounts. Premium is arrived at by multiplying IDV with Tariff Rate, and deducting No Claim Bonus and various discounts thereon. Let us understand each of the terms.
  
1.     IDV of the vehicle: IDV is the Sum Assured or the cover provided by the insurer. IDV is the maximum amount which the insurer agrees to compensate you with in case your vehicle is stolen or damaged beyond repair. IDV is calculated as the market value of the car at the time of insurance. For new cars, IDV is calculated on the basis of car's ex-showroom price. While renewing the insurance, the IDV will be adjusted for any depreciation it has undergone over the time, as per below table:

Age of the Vehicle
% of Depreciation for Fixing IDV
Not exceeding 6 months
5%
6 months to 1 year
15%
1 to 2 years
20%
2 to 3 years
30%
3 to 4 years
40%
4 to 5 years
50%

The IDV of vehicles aged over 5 years is calculated by mutual agreement between insurer and the insured.

2.     Tariff rate: refers to the rate at which insurance premium is payable. These rates are prescribed by IRDA and vary according to geographical location, cubic capacity and age of the vehicle.

i.      Geographical Zones: Motor insurance premium depends on registration place of vehicle. The premium in Tier I cities is comparatively more than Tier II and Tier III cities. That is because probability of insurance claim is more in Tier I cities because of higher costs, higher possibility of thefts, etc. For the purpose of Tariff Rates, two zones as below are prescribed:

·        Zone A: Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi and Pune
·         Zone B: Rest of India

ii.    Cubic Capacity: refers to the capacity of vehicle engine. More the cubic capacity of the vehicle, higher will be the insurance premium.

iii.   Age: Older the vehicle, higher is the premium.

Tariff Rates for Own Damage cover is as below:

Age
of
the
vehicle
Zone B
Zone A
Cubic Capacity
Cubic Capacity
Less than
1000 cc
More than 1000 cc but Less than 1500 cc
More than 1500 cc
Less than
1000 cc
More than 1000 cc but Less than 1500 cc
More than 1500 cc
Less than
5 years
3.039%
3.191%
3.343%
3.127%
3.283%
3.440%
More than 5 years but Less than 10 years
3.191%
3.351%
3.510%
3.283%
3.447%
3.612%
More than 10 years
3.267%
3.430%
3.594%
3.362%
3.529%
3.698%

3.     No Claim Bonus (NCB): is an important variable which affects the premium amount. NCB discount is available if no claim is made in the previous year. NCB gets accumulated over the years and can go upto 50%. However, NCB is lost as soon as any claim is made. It is to be noted that NCB can be earned only on Own Damage Premium. NCB is available at the renewal of a policy after the expiry of the full duration of 12 months. No Claim Bonus, wherever applicable, will be as below:


Discount
No claim made during preceding 1 year of insurance
20%
No claim made during preceding 2 years of insurance
25%
No claim made during preceding 3 years of insurance
35%
No claim made during preceding 4 years of insurance
45%
No claim made during preceding 5 years of insurance
50%

4.     Discounts: In addition to NCB, IRDA has prescribed discount on Own Damage Premium for Installation of anti-theft devices, membership of Automobile Association of India, opting for voluntary deductible/excess, etc.

Most important factor to keep in mind while finalizing motor insurance premium is the discount on Tariff Rate. Motor Insurance premium rates are largely tariff driven and prescribed by IRDA. While Tariff Rate for own damage premium are prescribed by IRDA, insurance companies have freedom to offer discount on the Tariff Rate. Negotiate with insurance company for higher discount on Tariff Rate in order to lower Motor Insurance premium.