The harsh reality of Indian IPO markets and how the HNI’S(High Net Worth Investors) and NBFC’S(Non-Banking Finance Companies) are working together to make the most of the rising bull markets. IPO markets in India is very hot for a past couple of years, new companies are getting listed on the exchange every single day and the share prices on listing are making humongous returns for the investors . Everyone wants to ride this wave and make a ton of money while the wave continues so to make the most of it HNI’s are turning to NBFC’s for a niche service they are providing called IPO Financing.
If you want to see this in action, you just need to look at the HNI (high net worth individual) segment of popular IPOs. You’ll often see that segment getting oversubscribed by 100 times and more. And that’s usually thanks to these loans they get. For instance, in July 2021, there were a bunch of IPOs trying to raise a total of ₹18,400 crores. But people bid a gargantuan sum of ₹8.86 lakh crores! And around 98% of that money came from these IPO-linked loans!
NBFC’s don’t have such sum of money lying around with them so they first themselves borrow the money by issuing Commercial Papers. Commercial Papers are very short term bonds that has to be repaid within a period of 7 days.
NBFC’s issue these and liquid Mutual Funds buy these CP’s and then this money goes into financing IPO’S for high risk taker HNI’S.
NBFC’s pay an annualised interest of around 5 per cent to mutual funds but charge a whooping 20 per cent from HNI’s that is quit a generous margin NBFC’s keep for themselves.
IPO allotment is a lottery , so no one knows who is going to get the allotment but HNI’s have to pay the interest on the borrowed sum regardless of them getting allotment. There is a lot of money involved and without any collateral or security so to mitigate the risk NBFC’s take a power of attorney(POA) for the demat account and the bank account of the investors.
RBI recently pulled out a big entity JM Financials a big NBFC who was a major player in this IPO financing . RBI among other things was concerned with JM Financials having a POA on their clients account. RBI also said that JM Financials was also giving extra leverage to its clients and not was following RBI guidelines on the limit any investor can borrow money.
Around the time of the Nykaa IPO, the RBI was getting worried about the massive amounts of money at play here. So they issued a diktat saying that no customer can borrow more than ₹1 crore to finance an IPO application.
But Moneycontrol says that NBFCs have ignored the rules and are lending out more. Could JM Financial have done that too?
Another rumour doing the rounds as per the Economic Times is that JM Financial has also been inflating the IPO subscription numbers.
What do we mean?
Okay, so during the IPO, entities can simply submit incorrect applications. For instance, it might mention multiple PAN card details which will eventually lead to the application being rejected. But it will still reflect as a subscription during the IPO period and can make things look rosy.
And maybe by showing HNIs the public interest in the IPO, the NBFC could even nudge the investors into relying on IPO financing to participate.
Now JM Financial has categorically refused all these allegations. They claim clean corporate governance too. But the RBI doesn’t think so. Also, maybe even the Securities and Exchange Board of India (SEBI) will have something to say about this matter. And who knows, every other NBFC involved in IPO financing will be jittery about what’s to come.