Greater role seen for non-banking lenders in first equity offerings

Likely to be classified as institutional buyers; announcement expected on April 26

Non-banking finance companies investing in initial public offerings of shares may soon enjoy institutional-buyer status reserved for foreign investors and mutual funds. 

Sources say the market regulator is likely to classify NBFCs with net worth more than Rs 500 crore as institutional buyers, in order to give them a greater role to play in IPOs. The potential move is seen benefitting bigger NBFCs such as Shriram Transport Finance Company and Bajaj Finance. 

The announcement will likely be made at the regulator's board meeting scheduled for April 26. This will also be new chairman Ajay Tyagi's first board meeting. Other likely announcements include unified licence for brokers in commodity and equity segments, instant access facility in mutual funds, and e-wallet for deploying money in MFs.

Experts said terming bigger NBFCs as institutional buyers would require changes to the regulator's rules. Besides, the Budget had proposed categorising NBFCs as institutional buyers. 

It is "proposed to allow systemically important NBFCs regulated by the Reserve Bank of India and above a certain net worth, to be categorised as QIBs (qualified institutional buyers) by Sebi (Securities and Exchange Board of India) on a par with banks and insurance companies, making them eligible for participation in IPOs with specifically earmarked allocations," Union finance minister Arun Jaitley had said, presenting the Budget. 

The objective is to strengthen the IPO market and channel more investments to it, Jaitley had said.

"Participation by a systemically important NBFC in IPOs will also help the issuers of shares. As these NBFCs have a large asset base, companies might look to tap them during road shows. NBFCs will also qualify as anchor investor in a public issue. This will give further boost to the overall IPO market," said Yogesh Chande, partner, Shardul Amarchand Mangaldas.

Prithvi Haldea, chairman and managing director of Prime Database, said classification of NBFCs as institutional buyers would add to domestic investor base and reduce dependence on foreign investors. "The regulator, however, will need to put in place safeguards to ensure NBFCs are not used by issuers and merchant bankers for any unfair practice," he added.

Share allotment in IPO falls into three buckets: institutional buyers, non-institutional investors (NIIs), and retail individual investors (RIIs). Typically, 50 per cent of the IPO is set aside for institutional buyers, 15 per cent for NIIs, and 35 per cent for RIIs. Current rules dictate that the NBFCs invest as NIIs. Individual investors with high worth also qualify as NIIs. 

"Allowing NBFCs in institutional-buyer segment will improve their chances of getting allotment. Currently, not too many NBFCs participate in IPOs. It remains to be seen if this potential move will help channel more investments," said an investment banker asking not to be named.

Meanwhile, the market regulator is likely to move to a single-licence regime for brokers operating in both equities and commodity derivatives segments. To this effect, a change in rules governing market infrastructure institutions may be proposed.

Further, the regulator may announce an instant-access facility for investments through MFs. It is also likely to allow investors to deploy as much as Rs 50,000 a month to mutual funds through digital wallets. The potential move will help digitise distribution of financial products.

The agenda for sebi chief’s first board meeting

Likely announcements

NBFCs to be classified as institutional buyers

Impact: Higher chances of getting allotment in IPOs, OFS

Unified licence for brokers in commodity and equity segments

Impact: Ease of doing business, cost efficiencies

Instant access facility in MFs 

Impact: Faster cash-outs 

Use of e-wallet for deploying  money to MFs

Impact: Easier access