Capping Of Limit Of NBFC Financing For IPOs To Have An Impact: India Ratings

India Ratings and Research (Ind-Ra) believes that the Reserve Bank of India's (RBI) capping of individual borrower's limit for non-banking finance companies (NBFCs) to INR10 million for initial public offer (IPO) financing would affect the oversubscription of IPOs and reduce the issuances of commercial papers.

Ind-Ra believes the size of IPO market varies based on the oversubscription and size of issuances which could run up to INR1 trillion. The agency expects this could restrict the use of IPO financing as a tool by large high net-worth individuals (HNI) and institutions for equity market participation and garner listing gains, along with lowering subscriptions for forthcoming IPOs post the regulation gets implemented. Ind-Ra however opines the IPO funding opportunity was limited to only select few large NBFCs and this regulation could end up distributing the business among several players. The agency also believes some companies would consider on bringing forward their IPO plans, leading to increased IPO pipeline, before the regulation come into effect in 1 April 2022.

The agency believes the nascent stage of recovery amid the fear of pandemic will require continued support from the policy makers, therefore it would be necessary for the RBI to maintain the easy money condition for some more time, although in a moderate way. Concomitantly, the impact of sustained easy money condition needs to be monitored for ensuring stability in the financial market. The step to curb leveraged investments in the equity market public offer is a part of the prudent market micro structure management in line with safeguarding financial market stability.

New Regulation Could led to Broad Basing of Funding and Moderation in Profit Pool: Ind-Ra opines the new regulations could led to broad basing of equity participation with inclusion of retail borrowers through this category. Earlier, brokers targeted HNIs for the ease of operations and a quick turnaround. This regulation also could lead to a rise in operating expense for reaching out a large client base to maintain participation levels.