Mumbai: The initial public offering (IPO) market is red hot, with five issues worth ₹7,400 crore opening for subscription this week, but enthusiasm is muted among finance companies that have historically lent to bidders in such share sales.
With stringent rules on IPO financing put in place by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), these lenders are keeping market borrowings at a bare minimum.
Subscriptions at a High
In November so far, non-banking financial companies (NBFCs) have raised Rs 3,500 crore through commercial papers (CP), bringing the total borrowing through the route for the year to Rs 20,100 crore, according to Icra.
In 2022, NBFCs raised Rs 45,740 crore through the instrument. In 2021, they raised a record Rs 7.1 lakh crore, and in 2020, Rs 2.38 lakh crore through the short-term commercial paper, it said. The borrowings in 2020 and 2021 were made to satiate the demand among rich investors, who borrowed and placed large bids in IPOs for listing gains. This resulted in many IPOs in this period seeing astronomically high subscriptions.
Concerned over the IPO frenzy fuelled by short-term borrowings, RBI imposed a ceiling of Rs 1 crore on the amount that NBFCs can lend per borrower per issue, effective April 1, 2022.
Change in Category
The results have been visible. For instance, one of the most successful IPOs in recent times – the Rs 5,352-crore IPO of FSN E-Commerce Ventures, parent of Nykaa – saw bids worth Rs 89,928 crore in 2021 in its high net worth individual (HNI) category alone.
In 2022, the highest bid for HNIs was Rs 30,402 crore for Adani Wilmar’s Rs 3,600-crore IPO. The next year, the top bid from HNIs declined to Rs 7,967 crore for SBFC Finance’s Rs 1,025-crore public offer.
A Sebi move also put the brakes on the IPO frenzy among HNIs by revising the allocation methodology. One-third of the HNI portion was reserved for applicants with a bid size of Rs 2-10 lakh; the rest was for those with an application size of over Rs 10 lakh.
“As a result of regulatory changes by RBI and Sebi, aimed at curbing speculative and artificial price discovery, NBFCs are not actively pursuing IPO funding for high net worth individuals, who used to borrow substantial amounts for potential listing gains,” said Himanshu Jain, executive director, 360 One Prime.
The extent of IPO financing was contingent on oversubscription and the size of the issuance. Previously, HNIs were able to invest up to 15% of the issue size. This product allowed for substantial exposure, with individual borrower exposure reaching up to Rs 150 crore, or based on single-party exposure limits.
This dynamic contributed to heightened demand and oversubscriptions within that category. The HNI portion of IPOs such as Paras Defence and Latent View was subscribed 930 times and 851 times, respectively, in 2021.
“There has been a steep decline in short-tenor CP issuances since the steps by RBI and Sebi to curtail NBFC lending money for IPOs,” said Deep Inder Singh, vice-president, Icra. “Also, with the reduction in funding period, CPs may no longer remain the most efficient source of capital for IPO financing. Whatever smaller amount is happening now, large share within that is towards proprietary operations.”
Brokers Continue
Stock broking firms are, however, funding clients’ IPO bets, though the quantum and terms are not comparable with the instances seen in 2021 and before. As these entities can finance IPOs only with their own cash, the extent of such funds flowing into the market has been limited.
“Retail brokers persist in providing funding for retail investors, utilising pledged shares or financing up to Rs 10 lakh,” said Jain of 360 One Prime.
Sebi’s shortening of the timeline for listing after an IPO from T+6 to T+3, which has become voluntary from September 1 and will become compulsory from December 1, could also make IPO financing less lucrative.
“IPO funding for investor categories surpassing Rs 10 lakh has witnessed a total depletion, but brokers persist in financing retail investors and those within the Rs 2-10 lakh range, aiming to offer enhanced facilities to clients,” said Suvajit Ray, head of products and distribution, IIFL Securities. “Nevertheless, with the dwindling IPO listing schedule, the feasibility of sustaining such funding is now uncertain.”
