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.
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:
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.
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 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.
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.
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.
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.
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.
The IPO Funding loans are available on certain terms and conditions. Here are some of them:
Borrower has to go through one time documentation processing for all upcoming issues. Required documents for IPO Financing includes:
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:
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.
Following are some of the pros of IPO Financing:
Following are some of the cons of IPO Financing:
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:
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.
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.
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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