IPO Funding is a short term loan which banks and other financial institutions provide to investors to fund their Initial Public Offer (IPO) application. An investor who would like to apply for equity shares in an IPO but do not have enough money can borrow the remaining amount from banks as a loan for 10 to 15 days. The Banks and Non Banking Financial Corporation (NBFC's) generally fund a part of IPO application while remaining is provided by the applicant.
IPO Funding is also known as IPO Financing or a Loan for applying in Public Issues.
The IPO Funding by banks is governed by RBI which allows banks to loan up to Rs 10 Lakhs for IPO Funding. The Loan Amount, Interest Rates and Duration of the loan vary from IPO to IPO.
When an investor applies in an IPO, the full amount is blocked for around 2 weeks. If the IPO is of a popular company, the issue gets oversubscribed many times and only a small portion of the application is allocated to the investor. The best way to get maximum earnings from these IPO's is by getting the maximum shares allocated which can only be done by applying for more shares.
In this scenario IPO Funding offers an opportunity to investor to leverage its own funds in primary markets and thereby increase the allotment quantum manifold.
In simple words, a retail investor who want to apply for a maximum application amount of Rs 2 Lakhs but do not want block more than Rs 20,000. He can get remaining amount through IPO Funding.
While IPO funding is more popular in 'Non Institutional Investors (NIIs)' category of IPO investors, in recent years many retail investors are using this to fund good IPO's where chances of making money is high.
As per RBI guidelines, a bank can loan up to Rs 10 Lakhs for applying in IPO. But the loan amount greatly depend on the IPO, the risk involve in the IPO, expected oversubscription, expected listing premium, state of market and many other factors.
IPO Funding is short loan which is usually given for around 2 - 3 weeks. The interest on the funding is charged mostly on daily basis.
Note that IPO Financing is done for specific IPO and cannot be used for multiple IPOs.
There is no fixed rate of interest. It depends on many factors including the IPO, the risk involve in the IPO, expected oversubscription, expected listing premium, state of market and many other factors.
No, an investor doesn't need a guarantor to get the IPO Funding.
Note: The person who is taking the loan has to provide a Power of Attorney (PoA) in favor of Bank/NBFC's to operate the applicant demat account. In case of a default, the lender may sell the holding to recover losses.
Yes, there are risk involves as the investor may have to book significant looses when using IPO Funding.
Following are few scenarios where IPO Funding could be a risky bet:
- If IPO doesn't get listed at a high premium on listing day then investor either has to pay to the lender and hold the shares or sell it for loss.
- Investor allocated more shares than he expected. In case of positive listing, investor can make good profit but if it is other way then losses are significant.
- If IPO shares get longer time to list, investor has to pay the interest on the loan amount. This happens in few IPO's whose listing got delayed by 2 weeks to 8 weeks because of stay orders by SEBI, who governs the IPO Process in India.
- If no shares are allocated in IPO because of over subscription or application got rejected, the applicant still has to pay the interest on the loan.