RBI permitted FIIs to Hedge Investments under ASBA Mechanism

The Reserve Bank of India on 20 May 2011 allowed foreign institutional investors (FIIs) to hedge foreign currency risks arising out of investment in IPOs made through ASBA route. The apex court decided to permit 30 day foreign currency-rupee swaps equal to the amount invested by FIIs in Indian initial public offerings under ASBA for the purpose of hedging. The move is likely to facilitate FII investments under the ASBA route into equity market.

Initial Public Offerings-related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism, foreign currency-rupee swaps will be thus permitted to the FIIs.
The bank increased the limits of cancellation and rebooking of forward contract cover of FII portfolios from 2 per cent of portfolio value as at the beginning of the fiscal to 10 per cent with immediate effect. The swap contracts if cancelled once cannot be rebooked. Rollovers are not permitted under this scheme.

The ASBA facility for public offers was introduced in September 2008 for retail investors. Under the ASBA facility, the application money of investors remains blocked in his bank account until the process of allotment of shares is completed. The facility eliminates any delays related to refunds for the unallocated shares. Initially, it was offered to retail investors only and was given to other investors in 2009.

SEBI recently made ASBA facility mandatory for all non-retail investors (high net-worth investors and institutional investors) investing in public and rights issues.