New funding mechanism takes wing for HNIs bidding Rs 2-10 lakh in an IPO

Under the new mechanism, non-banking finance companies (NBFCs) are providing up to Rs 8 lakh on a margin amount of Rs 2 lakh for a flat fee of Rs 2,000, said industry sources.

A new funding mechanism for just-concluded initial public offerings (IPOs) has come to fruition. Under this structure, non-banking financial companies (NBFCs) will provide up to Rs 8 lakh on a Rs 2-lakh margin for a flat fee of Rs 2,000, inform industry sources.

Using the borrowed sum and Rs 2 lakh of their own, individual investors can apply to the freshly-minted category for high networth individuals (HNIs).

This new segment is a sub-category within the HNI quota for placing bids between Rs 2 lakh and Rs 10 lakh in an IPO.

“By availing of the new IPO funding, individual investors can improve their chances of getting a higher allotment. For oversubscribed IPOs, the maximum an investor can get is shares worth Rs 15,000 in the retail quota. Now, they can get shares of at least Rs 2 lakh.  This is a fairly secure way of lending for NBFCs since the money remains blocked in an investor account. More notably, the chances of an investor getting more than Rs 2 lakh worth of shares — the margin provided by a client — are slender,” says an investment banker.

Retail investors place bids of less than Rs 2 lakh. Individual investors placing bids for a higher sum have to take the HNI route. To improve the chances of relatively smaller HNIs, the Securities and Exchange Board of India (Sebi) has forged a new segment for those bidding between Rs 2 lakh and Rs 10 lakh.

“Earlier retail investors used to get funding up to Rs 2 lakh if they showed Rs 15,000 in their account by brokers (who had an NBFC arm). Their applications used to get upgraded to Rs 2 lakh. But most of them used to get allotment only for Rs 15,000 in a well-subscribed IPO. That has shifted to the new HNI category,” says Arun Kejriwal, founder, Kejriwal Research & Investment Services.

Harsha Engineers’ IPO — the most subscribed this year — attracted 2.65 million applications, with about 115,721 coming in the Rs 2-10-lakh HNI category.

The IPOs of Syrma SGS and DreamFolks that concluded earlier also saw investors avail of NBFC financing.

Industry players say the new funding mechanism is fairly new-fangled and will gain popularity once the IPO market opens up fully.

Some savvy investors are now placing bids in the new HNI category instead of retail. But not all investors are opting for financing. Many are using their own funds.

“A lot of retail investors have become HNI investors. The response has been phenomenal,” says Suvajit Ray, head of product and distribution, IIFL Securities.

“When oversubscription goes up, so does contribution. The margin used to be 1-2 per cent. Now it is as high as 20 per cent. Since margins were low and credit availability high, customers had to square off the entire volume on Day One. Now investors are holding stocks for a longer duration,” adds Ray.

Three key regulatory changes have seen the IPO financing model evolve and adapt, observe market watchers.

Starting April 1, the Reserve Bank of India imposed a cap of Rs 1 crore on IPO financing by NBFCs. The central bank introduced this new rule to curb excessive speculation. NBFCs cashed in on last year’s IPO boom by lending trillions of rupees to HNIs.

This month, Sebi also tweaked rules wherein IPO applications can only be processed if there are adequate funds at the time of application. This rule was brought in to achieve parity between IPO segments.

Also, the Rs 2-10-lakh sub-category with the HNI segment was introduced.

Industry players say more investors will apply in the new category as it will give investors more ‘bang for the buck’.

“The chances of allotment will be slim. If one is lucky, the absolute gains will be much higher, in contrast with the retail segment,” adds an investment banker cited earlier.

• RBI imposing Rs 1 crore cap on IPO financing by NBFCs
• Introduction of new-sub category for HNIs for application between Rs 2 lakh and Rs 10 lakh
• Full application amount required at the time of applying for IPOs

What’s the new mechanism

• Investors need to have Rs 2 lakh of their own
• Can borrow additional Rs 8 lakh for a flat fee of Rs 2,000
• Can place bids worth Rs 10 lakh under new HNI sub-category