Regulatory eye on NBFC financing of HNIs’ IPO appetite


MUMBAI: Regulators are preserving a detailed eye on the deluge of shadow financial institution lending to people trying to take benefit of the increase market in preliminary public gives (IPOs), aware of potential systemic dangers, mentioned individuals with the data of the matter. RBI’s draft paper on the proposed regulatory framework for nonbanking finance firms (NBFCs) launched final Friday prompt a funding cap of Rs 1 crore per particular person for a shadow financial institution. Banks can lend Rs 10 lakh per individual for IPO financing.

Riding on the first market wave, NBFCs reminiscent of Bajaj Finance, Aditya Birla Finance, Motilal Oswal, IIFL Wealth, Infina Finance, JM Financial and Edelweiss amongst others have been funding excessive web price people via short-term lending, typically for simply five-seven days.

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From Burger King to Happiest Minds, Gland Pharma to Route Mobile and even final week’s Indigo Paints, well-heeled traders are leaping on the alternative to rake it in inside a brief span. That debut bump is resulting in synthetic asset inflation and worth distortions, in response to some market contributors.

The danger is a tepid debut, reminiscent of SBI Cards, which noticed an inventory low cost of 13% over the difficulty worth.

“IPO funding is creating an unhealthy market and distorting the price of IPOs on listing day as most of the subscribers through funding will sell on the first day itself,” mentioned Arun Kejriwal of KRIS Research and Advisory.

Typically, to fund shoppers, NBFCs elevate short-term cash via business paper at 4-5% after which lend at 6.5-8%. In the final six months, the highest 10 finance corporations have raised practically Rs 1.8 lakh crore via business paper within the major market with a tenure of 7-10 days for IPO funding, other than self-funding and different sources of funds.

“It’s a win-win for all,” mentioned an govt with a number one NBFC. Funds are raised with a yield to maturity between 3.2% and 6.25% every year. “The HNIs make money from the listing premium, and the gains in the recent issuances have been mind boggling. If the pricing is good, there is no looking back.”


A Mumbai-based analyst with a number one international institutional investor sounded a warning.

“What if there is a Black Swan event between financing and the listing day? Who buys these CPs–mainly mutual funds. Remember what happened during IL&FS?” he mentioned. “Additionally, where is the actual price discovery in the listing when the demand generated is largely artificial.”

NBFCs have loaned about Rs 40,000 crore to excessive web price people (HNIs) for the Mrs Bector Foods and Gland Pharma IPOs, in response to estimates from shadow financial institution executives and merchants. For occasion, a south Mumbai businessman received a name from his wealth supervisor concerning the Burger King IPO, a runaway success with greater than 300 occasions oversubscription. The NBFC that managed half of his funding portfolio was blissful to supply a mortgage of Rs 49 crore at 7.5% if he put up solely Rs 50 lakh.

About Rs 35,200 crore was raised for the Mrs Bector Food IPO whereas round Rs 26,000 crore was raised for the Burger King IPO, in response to information on ICRA-rated business paper. The quantity raised for Chemcon Speciality Chemicals and Computer Age Management Services was greater than Rs 37,000 crore. Similarly, about Rs 24,700 crore was raised for Happiest Minds Technologies. To ensure, these figures are only for CPs rated by ICRA.


“We have seen buoyant demand for IPO financing of late, which can be attributed to bullish market conditions, quality of companies coming out with IPOs and expected listing premium by investors,” mentioned Shankar Vailaya, CEO, Sharekhan BNP Paribas Financial Services.

NBFCs cater to demand that’s unmet by banks.

“The IPO financing market is very vibrant in 2020, supported by an increase in HNI investors’ interest in IPOs in the quest for listing gains, with average demand between Rs 40,000 crore to Rs 50,000 crore per IPO,” mentioned Shalibhadra Shah, Group CFO, Motilal Oswal Financial Services. “With banks not active in this segment due to regulatory restrictions, the field is dominated by NBFC arms in the capital markets and wealth management businesses.”

The HNI portion in Mrs Bector’s Food was subscribed by 621 occasions, producing demand price Rs 50,645 crore. The price of funding in Mrs Bectors Food was within the area of Rs 212-217 per share. The subject which was priced at Rs 288, listed at Rs 501 and ended on the primary day at Rs 595, for good points in extra of Rs 300. Even if one have been to think about the weighted common, the good points have been within the area of Rs 285-290. (SEE CHART)

Financiers insist the chance is restricted since there’s a margin for the lender in phrases of shares. Normally, greater the funding price, decrease the probabilities of getting cash on the IPO in spite of everything prices are factored in. Investors have to pay curiosity on your entire quantity borrowed and never on the quantity really allotted. That is why greater oversubscription works towards debtors as they should have extra curiosity on idle funds.

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