Key regulatory changes are set to change the way wealthy individuals invest in initial public offerings (IPOs), a report by Business Standard noted. Starting this month, the Reserve Bank of India (RBI) has imposed a cap of ₹1 crore on IPO financing by non-banking financial companies (NBFCs).
"This is expected to bring down oversubscription levels as earlier NBFCs lent in excess of ₹100 crore to individuals to place wagers on IPOs," the report stated.
Further, capital market regulator Securities and Exchange Board of India (Sebi) has introduced a new sub-category for those investing between ₹2 lakh and ₹10 lakh. A third of the HNI quota will be reserved for such investors.
"Several retail applications are expected to spill over into this segment. Investment bankers said these two rule changes could result in a significant change in application patterns as investors adjust to the new market realities," the report stated
In October, the RBI announced a ₹1-crore ceiling per borrower for financing subscriptions to IPOs in a bid to curtail excessive speculation. The rule came into effect on April 1.
NBFCs were able to cash on last year’s IPO boom by lending trillions of rupees to HNIs. The modus operandi was to raise capital by issuing seven-day commercial papers (CPs) ahead of blockbuster IPOs, noted the BS report.
"The money was lent by maintaining a spread of 200-400 basis points. The borrowers managed to make money as the listing day pop exceeded the acquisition cost even after factoring in the borrowing charges in most cases. However, with the introduction of the ₹1-crore cap, the IPO financing market is likely to shrink considerably, impacting NBFCs," it added.
NBFCs told the market daily that they now expect investors to apply through multiple accounts belonging to family members and friends. They are hoping that the increase in applications will partially help offset the expected drop in IPO financing, added NBFCs. Some said there could be more workarounds too.
“RBI has banned IPO financing, a form of unsecured lending. However, there is no cap on loan against shares. So NBFCs will lend to investors who pledge their securities,” an industry player told BS. “Also, the ₹1-crore cap applies only on NBFCs. There could be other financial institutions, which are not registered as NBFCs, who can still do IPO financing,” he added.
Sebi rules define those who invest more than ₹2 lakh in an IPO as HNI. Huge oversubscriptions meant those investing between ₹2 lakh and ₹10 lakh barely got any allotment in the HNI category. To help such investors, Sebi has introduced a new sub-category. While this is a welcome step, the number of shares reserved for such investors will only be 5 percent of the total IPO size as against 35 percent for retail investors—those investing less than ₹2 lakh. This is because only 15 percent of the IPO size forms the HNI quota. And only one-third of shares in this category will be reserved for the new class of investors. Experts say this new category will see huge oversubscription during popular IPOs.
“Investors who have more than ₹2 lakh surplus in their account are likely to take this new route. In case of huge oversubscription shares will be allotted based on a lottery system just as it is done in the retail category. However, in retail the maximum allotment one can get in blockbuster IPOs is for around ₹15,000. Here if you are lucky you will get ₹2 lakh worth of shares,” said another investment banker to BS.
Industry players say new playbooks will emerge once IPO market activity starts buzzing again, added the report.