Yes subscription to IPOs as well as FPOs can also be financed by NBFC arm of broking companies and banks at competitive rates for both retail and HNI clients. Typically however the short-term credit is extended to HNI investor category. In the run up to IPOs last year which made huge listing gains in case of some of the IPOs, frenzy for IPO investment once again drew investor interest.
How IPO financing works?
In it, for the investment or subscription application to be made for a particular IPO, investor is required to pay only the upfront margin money which is IPO specific and differs across NBFCs.
Interest rate charges and loan tenure
A charge of 10-11% is levied as interest rate for IPO financing and the tenure is between the close of the IPO and its listing on the exchange i.e a period of some 6 days.
The companies financing the amount usually raise the amount by issuing short-term debt instruments.
In some of the case, IPO loan tenure or repayment period applies from the date of application for IPO loan or depends on the decision taken at the time of IPO funding.
Actual days for repayment of loan from date of application or as decided at the time of IPO funding
Documents required for IPO loan processing
Proof of identity
ITR and other financial information of last 3 years
Net worth certificate
NBFCs involved in IPO financing activity
• ECL Finance Limited
Sharekhan Financial Services Private Limited
• JM Financial Products Limited
• Aditya Birla Finance Ltd
• Moneywise Financial Services Pvt Ltd
• Axis Finance Limited
Loan quantum sanctioned under IPO loans
A loan ranging from 1 lac to upto some crores can be extended by the NBFC company of the brokerage arm. However its amount varies from NBFC to NBFC.
Benefits for the investor in IPO financing
1. The chances of allotment as well as the allotment size of equity in the IPO or FPO issue are maximized.
2. Small margin money can result in profits growing for the investor upto manifolds.
3. Profitability from the application if the issue performs well can be made in a span of just few days.
4. End to end support is extended by the lender in respect of the making the application for the IPO issue to sending the securities.
IPO financing from the point of view of financing companies
If all goes well with the IPO, as per a leading business daily report, NBFCs financing such IPO or FPO issue are able to better manage risk with the margin money that is charged for such financing. Margin money is charged based on the subscription estimate made by the brokerage firm. So in a case, when the over-subscription is expected to be higher by 10 times, 10% margin money may be charged.
NBFC company has a lien on the shares allotted in case of the IPO issue. So in case of default by the borrower, the lender has the capacity to liquidate the held shares to recover the loan amount together with the interest.
Also the account in this case is operated by the company extending the loan facility instead of the investor himself.
However, in the other case when the IPO underperforms in terms of subscription, the risk factor turns out to be huge for the lender. Also, the worse can be seen when the shares allotted fail to fetch price below the offer price. And they then can be defaulters for the mutual funds to whom they fail to service their debt obligations.