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IPO Funding in India - A detailed explanation of IPO loan process

Published on Friday, September 8, 2017 by Mukesh Kothari

Initial Public offers (IPOs) are one of the rewarding investment opportunities available to investors in India. Good amount of profits can earned in a very short term (6 to 10 days) by investing in IPOs. Profits from the IPO investment can be maximize by applying for large chunk in High Networth Individual (HNI) category where the allotments are done in a proportionate basis in case of oversubscription. Shortage of funds usually affects investor's ability to earn from good IPO's.

IPO Funding (or IPO Financing) is a loan offered for applying in primary stock market by NBFC's to high net worth individuals (HNI). The investor pays only small margin for applying in IPO and rest amount is funded by the lender. As per ICRA, over Rs 20,000 IPO funding is offered in a good mainline IPO.

Through IPO Funding, an investor can leverage its own funds in primary market and thereby maximize the profits in a very short span of time. IPO Funding Loans are mostly available to HNI clients. It helps HNI's who would like to maximize their chances of allotment in an IPO.

IPO Funding Providers

Many Non-banking finance company (NBFC) in India are involve in security based lending business. In most cases these NBFC's are part of a large stock brokerage firm. Most of these companies are rated A1+ (highest short-term credit rating) from CRISIL.

NBFC's borrow money from banks and Mutual Funds for these loans. Banks in India cannot directly offer these short term loans due to regulatory restrictions.

Some of these NBFC companies who are involve heavily in IPO funding includes:

  • Edelweiss through ECL Finance Limited
  • Sharekhan through Sharekhan Financial Services Private Limited
  • JM Financial through JM Financial Products Limited
  • Aditya Birla Money through Aditya Birla Finance Ltd
  • SMC Finance through Moneywise Financial Services Pvt Ltd
  • Axis Bank through Axis Finance Limited

These NBFC's are well linked with their group companies for related services broking, banking and Investor advisory. These NBFC's only offer loans for applicant under HNI category.

Tenor of IPO Funding

IPO Funding loans are short term loans. In most cases they are for 7 days, from the IPO closing day to date of listing of IPO shares. Repayment tenor of these short term loans is up to 3 months. Most lenders offers flexibility to hold or sell the shares depending on market trends and nature of the securities purchased.

Interest Charged on IPO Loans

Interest is charged between 8 to 12% and varies by the lender. In addition the lender also earn interest from the money remain locked in the bank account until allotment is done.

Other Charges for IPO Financing

Customer pays a onetime loan process charges which is usually around Rs 1000. Also the stamp duty for Loan Agreement and other document is payable by the borrower.

Loan Margin (Margin Money)

Customer pays a margin amount upfront to avail the loan. The loan margin is calculated on case to case basis. The margin account can be the cash deposited in the account or securities provided.

Amount Available for Funding

The loan amount varies by the lender and the IPO. In most cases NBFC's fund HNI's with crores of rupees for IPO's.

Minimum / Maximum Loan Amount Offered

It varies by the lender. i.e. Sharekhan offers loans from Rs 1 lakhs to Rs 18 Crore. Aditya Birla Finance offers minimum loan amount of Rs 1 Cr. Axis Finance offers minimum funding of Rs 25 Cr.

Terms & Conditions to Get the Loan

The IPO Funding loans are available on certain terms and conditions. Here are some of them:

  • Individuals should be major/ HUF/ Corporate / LLPs.
  • The applicant should have valid PAN card.
  • The applicant has to open a bank account with a lender's preferred bank on which the borrower creates Power of Attorney (PoA) in the favor of the lender. Borrower cannot operate this Bank Account, since he has given the operational right to the lender through PoA. This account is opened specifically for funding purpose only. Borrower doesn't get cheque book, ATM Card and other facilities including withdraw the amount as provided in other normal Bank Account.
  • The borrower has to open a new demat account for funding purpose and provide the PoA to the lender. Similar to funding bank account, the borrower cannot operate this account.
  • Borrower has to pay the margin money and interest upfront to avail the loan.
  • Guarantor is not required for IPO Funding.

Documents Required for IPO Funding

Borrower has to go through one time documentation processing for all upcoming issues. Required documents for IPO Financing includes:

  • Proof of Identity
  • Proof of Address
  • Last 3 years of Financials
  • MOA & AOA, List of Directors
  • Shareholding Pattern
  • List of Signatories
  • Partnership Deed
  • Net Worth Certificate

End-to-end Process of IPO Funding

In most cases, the lender takes care of end to end process of IPO application for its customers who are availing IPO funding. A dedicated relationship manager is made available which helps the customer with the process. Here are few standard steps:

  1. Open Funding Accounts with Lender (One time)
  2. Open a Demat Account with Lender or provide PoA to an existing account (One time)
  3. Fill forms for IPO funding and provide all required documents (One time)
  4. Let lender know about the IPO to invest in, quantity and date.
  5. Pay the margin or create the security
  6. Funds disbursed within 24 working hours of the request
  7. The leader apply for IPO share on your behalf.
  8. Money get blocked while allotment is in progress.
  9. Allotted shares are credited in to the demat account and money is withdrawn for the allocated shares.
  10. Customer instruct lender to sell the allocated shares.
  11. Settle the profit/losses with the lender.

Repayment of IPO Funding Loans

The loan amount and margin paid upfront by the customer remain locked in the bank account. Proceeds from sales of securities to be routed through this PoA Bank Account.

Customer has to submit a request to the lender to withdraw the profits earned from the transaction. On receiving the request, lender transfer the requested amount in the investors other Bank Account mapped with them.

In case of the losses, the lender recovers the money from the margin paid. If the amount is more, borrower has to deposit the amount.

In most cases transactions are settled within 7 days from the date of allotment. But based on the agreement, the settlement can be done up to 90 days.

Advantages of IPO Funding

Following are some of the pros of IPO Financing:

  1. Investor can apply for more shares, thus increasing your chances of a large allotment
  2. Offers good opportunity to make huge profits in 6 to 10 days.
  3. Only small amount of margin is needed which increases the profits multifold.
  4. Cash or securities can be used as margin.
  5. Investor works closely with relationship manager throughout the process. The end-to-end process is handled by the lender. This include activities like filling IPO application, banking transactions, selling the securities etc.
  6. Funding cost came down significantly in recent time because of quick IPO listings and reduced interest rates.
  7. Simple Documentation and streamlined speedy processing of loans.

Disadvantages of IPO Funding

Following are some of the cons of IPO Financing:

  1. It's a high risk high reward investment. It could result in to massive losses if things goes wrong.
  2. It's a highly leveraged bet to make quick bucks. Investor pays only small amount of margin money. The losses could be multi fold.
  3. This product is not for investors applying in retail category.
  4. Borrowing limit varies as per the scheme launched for the IPO, and on the level of subscription under the HNI category.
  5. Interest rate varies as per the scheme launched for the IPO, and is charged upfront.
  6. The margin amount varies by the IPO, and on the level of subscription under the HNI category.

Frequently asked questions about IPO Funding

1. What happens if the IPO fails at the time of listing?

IPO Funding offers HNI investors to borrow money for IPO investment. The borrower & leader both carefully access the risks before funding. They go through historic data, market trends, grey market premiums, subscription, margin amount, customer history and many more factors before offering the loan. Despite this many a time's things go wrong.

Some common risks in IPO Investment through funding includes:

  1. There is huge difference in the IPO subscription (over or under subscribe)
  2. The IPO shares listed at discount
  3. IPO processes get delayed for some reason

In most cases lender recovers the losses from the margin provided by the borrower. In case it doesn't happen, the borrower has to pay for the remaining amount or keep paying interest based in the terms in agreement.

2. What happens to this loan if shares are not allotted?

In HNI category of investors in an IPO, shares are allocated in proportionate basis in case of oversubscription. Unless the application is rejected by the registrar of the IPO, the HNI investor always get something.

In case not enough shares are allocated to cover the cost of borrowing, the leader takes part of the margin money and investor book the losses.

3. Should an investor go for IPO funding?

The demand of IPO Funding has increased over the last few years. Increase in HNI investors, lower borrowing cost (low interest and shorter time for IPO), good IPO's, positive market moments and listing gains of IPO shares made the IPO financing attractive among HNI's.

HNI investor with a good understanding of equity market and risks related to it could make good profits with IPO funding.

IPO funding has high risk profile similar to investment in securities. Funding should be considered after carefully analyzing the IPO, issue price, market & industry trends and cost of borrowing.

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