It is a loan given by finance cos to investors to apply for an IPO. It gives investors more flexibility to apply for more shares in an IPO, increasing their chances of a bigger allotment.
How much can you borrow?
There is a cap of Rs 1 crore per PAN for every IPO to borrow. Until last year, when the RBI brought in this restriction to prevent systemic risks, investors could borrow as much as they wanted, in theory. Several lenders require investors to borrow at least Rs 25 lakh for this purpose
Who usually takes loans for IPO financing and what are the terms for the loans?
The facility is usually tapped by HNIs who put at least Rs 10 lakh in these issues. The loan duration typically spans from 3 to 6 days, as IPOs are listed within three working days from the issue closure. NBFCs charge a steep annualised interest rate of 20-30% depending on the client and may charge an additional processing fee of up to 5% of loan amount. Some NBFCs apply fl at interest rates and processing fees.
How does the facility work?
- An investor would first open an account with the finance company and a demat account with an associated brokerage
- The investor has to bring in the initial margin—cash or shares—for the loan
- The loan is transferred to the borrower’s a/c while the IPO application is made through this demat account
- The lender retains control over the allotted shares in the IPO, as per an agreement
- Once the shares in the IPO are allotted, the lender sells the shares mostly on the listing day because of the higher risks and interest costs.
- The investor gets the proceeds after the deductions and the charges If the investor doesn’t get shares in the IPO, the loan is repaid along with the interest
- If the stock lists lower, the investor must make up for the loss, failing which lenders could sell the shares put up as margin
