Regulatory changes set to change the way wealthy individuals invest in IPOs

IPO application patterns set to change as investors adjust to new realities

Key regulatory changes are set to change the way wealthy individuals invest in initial public offerings (IPOs). Starting this month, the Reserve Bank of India (RBI) has imposed a cap of Rs 1 crore on IPO financing by non-banking financial companies (NBFCs).

This is expected to bring down oversubscription levels as earlier NBFCs lent in excess of Rs 100 crore to individuals to place wagers on IPOs.  Further, capital market regulator Securities and Exchange Board of India (Sebi) has introduced a new sub-category for those investing between Rs 2 lakh and Rs 10 lakh. A third of the HNI quota will be reserved for such investors.

Several retail applications are expected to spill over into this segment. Investment bankers said these two rule changes could result in a significant change in application patterns as investors adjust to the new market realities. 

 

Rs 1-crore cap

In October, the RBI announced a Rs 1-crore ceiling per borrower for financing subscriptions to IPOs in a bid to curtail excessive speculation. The rule came into effect on April 1.

NBFCs were able to cash on last year’s IPO boom by lending trillions of rupees to HNIs. The modus operandi was to raise capital by issuing seven-day commercial papers (CPs) ahead of blockbuster IPOs.

The money was lent by maintaining a spread of 200-400 basis points. The borrowers managed to make money as the listing day pop exceeded the acquisition cost even after factoring in the borrowing charges in most cases. However, with the introduction of the Rs 1-crore cap, the IPO financing market is likely to shrink considerably, impacting NBFCs.

NBFCs said they now expect investors to apply through multiple accounts belonging to family members and friends. They are hoping that the increase in applications will partially help offset the expected drop in IPO financing.

Some said there could be more workarounds too.

“RBI has banned IPO financing, a form of unsecured lending. However, there is no cap on loan against shares. So NBFCs will lend to investors who pledge their securities,” said an industry player. “Also, the Rs 1-crore cap applies only on NBFCs. There could be other financial institutions, which are not registered as NBFCs, who can still do IPO financing,” he added.

New HNI category

Only a few hundred HNIs mastered the game of borrowing and applying in the IPOs. This crowded out relatively smaller investors. Sebi rules define those who invest more than Rs 2 lakh in an IPO as HNI. Huge oversubscriptions meant those investing between Rs 2 lakh and Rs 10 lakh barely got any allotment in the HNI category. To help such investors, Sebi has introduced a new sub-category. While this is a welcome step, the number of shares reserved for such investors will only be 5 per cent of the total IPO size as against 35 per cent for retail investors—those investing less than Rs 2 lakh. This is because only 15 per cent of the IPO size forms the HNI quota. And only one-third of shares in this category will be reserved for the new class of investors. Experts say this new category will see huge oversubscription during popular IPOs.

“Investors who have more than Rs 2 lakh surplus in their account are likely to take this new route. In case of huge oversubscription shares will be allotted based on a lottery system just as it is done in the retail category. However, in retail the maximum allotment one can get in blockbuster IPOs is for around Rs 15,000. Here if you are lucky you will get Rs 2 lakh worth of shares,” said another investment banker.

Industry players say new playbooks will emerge once IPO market activity starts buzzing again.