RBI diktat for NBFCs to hit IPO subscriptions in a big way

A Reserve Bank of India (RBI) notification issued today to revise the regulatory framework for non-banking financial companies (NBFCs) is expected to hit the initial primary market (IPO) segment in a big way as the central bank has effectively capped the leverage that individual investors, especially high net worth investors (HNIs), avail while applying for shares in a public issue.

The RBI has directed NBFCs to cap IPO financing at Rs 1 crore per borrower while adding that the new guidelines would come into effect from April 1, 2022.

"There shall be a ceiling of Rs 1 crore per borrower for financing subscription to Initial Public Offer (IPO). NBFCs can fix more conservative limits," stated the RBI notification. "The instructions relating to ceiling on IPO funding given vide para 3.1(d) of the Annex shall come into effect from April 01, 2022," it added.

IPO financing is a huge business for NBFCs that earn a lot of interest income from such lending. Industry participants estimate that NBFCs do such short-term lending while charging an interest in the range of 6-10 per cent per annum depending on the demand for a particular issue.

Currently, NBFCs lend huge amount of money to the borrowers with industry estimates pegging the amount to hundreds of crores for a typical large-sized IPO.

More importantly, it is believed that at times the margin - the money put up by the borrower -- is just 1-2 per cent and the leverage is in the range of 70 to 80 times. In other words, an individual could put in a bid for Rs 70 crore by having just Rs 1-2 crore in his account, which leads to an exponential - and even artificial -- rise in the subscription numbers of an IPO.

The latest move assumes a lot of significance for two reasons - there are many big-ticket IPOs scheduled to hit the market in the coming months and a significant portion of the bids in the non-institutional portion is based on IPO financing done by NBFCs.

An IPO comprises of three categories or reservations for investors to put in their bids. The categories are for institutional investors, HNIs and retail investors. Typically, the reservation is 50 per cent for institutional investors, 35 per cent for retail and 15 per cent for HNIs. If the company is a loss-making one, then the quantum of reservation for institutional investors is increased to 75 per cent.

This year has seen many IPOs that saw a huge oversubscription in the HNI category. MTAR Technologies, for example, saw its HNI portion getting subscribed 651 times. Similarly, the HNI portion of the IPO of Tatva Chintan Pharma Chem was subscribed 512 times while the retail category was subscribed only 35 times. The IPO of Shyam Metalics and Energy, which was subscribed 121 times, saw its HNI segment getting subscribed 340 times.

A rush to launch IPOs

Interestingly, market experts believe that the latest regulatory change could lead to companies rushing with their IPO process so that they can hit the market before April next year.

"A long pending demand which was recognised by RBI in January 2021 will finally see the light of the day in April 2022," said Arun Kejriwal of Kejriwal Research & Investment Services.

"Unbridled speculation in primary market will come to an end post rationalisation of borrowing by individual HNIs being restricted to Rs 1 crore per entity. It's a defining moment for primary markets in India," he added.

"Regulators are trying to clampdown on the huge bids being put by HNIs who borrow to invest for listing gains. Such HNIs put in huge bids which increase their chances of higher allocation and thereby higher listing gains. These only add to the speculative activities," said Pranav Haldea, managing director, Prime Database.

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