Query- Issuer Limited (the company) made a public issue of 1,000,000 equity shares of Rs. 10 each, issued at a premium of 2100 per share. In response to its offer for the public issue, the company received applications for 1,600,000 shares, which included applications for 750,000 shares under the Applications Supported by Blocked Amounts (ASBA) facility. At the balance sheet date, the company is still evaluating the applications received and has not finalized the basis of allotment.

How should the company treat the applications received under the ASBA facility?

Response

The Securities and Exchange Board of India (SEBI) introduced the ASBA facility to provide an alternate mode of payment in public/ right issues. For the applications received under this facility, the share application money remains in the investor’s bank account till the finalization of the allotment; the bank merely blocks this amount separately. This application amount is credited to the issuer’s bank account by debiting the investor’s bank account only at the time when its application is selected for the allotment of shares. This implies that the issuer does not have the money on share applications received under the ASBA facility till the allotment of shares.

The ASBA scheme provides an investor with a right to withdraw its application at any time before the finalization of allotment. If an investor withdraws its bid before the finalization of allotment, its blocked amount is released. This indicates that the issuer does not have a legal/contractual right to receive application money from the investor till the finalization of allotment. As a result, the contract between the issuer and the proposed investor, at the reporting date, is “executory” in nature, where neither of the parties has performed any of their obligations. Under AS 29 Provisions, Contingent Liabilities and Contingent Assets, such contracts are not recognized in the financial statements unless they are onerous. Accordingly, we believe that the company should not recognize any receivable/payable toward the applications received under the ASBA facility, since it has not finalized the allotment. However, it should disclose this fact in the notes to accounts.

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