To be sure, the IPO financing market may shrink after the limit of Rs 1 crore per borrower as on April 1.
Dealers said long-term wealthy investors who bid less than Rs 50 lakh in the IPO may now get higher allocations in the absence of astronomical bids.
Tushar Bopche, Co-Founder, Brainstation India said, “The new regulation is more inclusive where small lenders will get good opportunities to lend to investors willing to subscribe to the shares.”
“Individuals with genuinely high net worth will get a better opportunity to apply for an IPO, which will lead to creation of long-term wealth,” he added. “It is currently unavailable due to focused IPO funding.”
The Reserve Bank of India (RBI) on Friday said NBFCs cannot lend more than Rs 1 crore to investors willing to buy stocks in the initial share sale from April 1 next year.
Till now, wealthy investors had borrowed money from large NBFCs which generally charge higher rates depending on the demand for money. NBFCs in turn borrow through commercial papers or debt securities of short duration ranging from seven to ten days.
An NBFC can either sell CPs or use internal resources for IPO funding.
Raman Agarwal, Area Chair – NBFCs, Council for International Economic Understanding (CIEU) said, “IPO funding is a high-risk leveraged business as you can earn high margins as well.” “Small NBFCs with dedicated focus and expertise on capital markets are likely to join in following the new rules limiting large funding. This is aimed at mitigating potential risks.”
Before the first day of listing, these investors enter into informal deals with potential long-term buyers and effect the transaction on the day of listing. This is said to have resulted from unusual listing gains with large membership bids.
“Both the buyer and seller determine the price level subject to different conditions. They settle it on the exchange platform – often on the first day,” said a dealer involved in such transactions.
Raising resources can become a challenge for those small entities as the cost of funding will be higher as compared to top rated NBFCs selling CPS.
Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, said, “While some of the larger NBFCs are more active in IPO financing, smaller NBFCs can enter this space depending on how well they meet the challenges of raising funds. How do you manage? “If NBFCs increase the number of borrowers to whom they provide IPO financing, the operational risk may increase.”