Dizzying debuts in the IPO market, as in the case of D-Mart last year that listed with a spectacular gain on the day of listing, aroused big investor interest in primary market. This has led to a significant jump in the quantum of capital mobilized through IPOs and therefore the need for borrowed funds.
With IPO funding, a bit of cash margin investment by investor can go a long way in leveraging returns if an NBFC helps with a loan to add to the size of the investment.
IPO Funding (or IPO Financing) is a loan offered for applying in primary stock market by NBFC’s (non bank finance companies) to retail, high net worth individuals (HNI) as well as Corporate entities and Partnership / LLP firms. The investor pays only small margin for applying in IPO and rest amount is funded by the lender.
As per ICRA, over Rs 20,000 IPO funding is offered in a good mainline IPO!
How it works
A customer pays a margin amount upfront to avail the loan. The loan margin is calculated on case to case basis based on expected over-subscription of IPO. The margin account can be the cash deposited in the account or approved securities provided on which suitable margin haircut is provided.
Say, for instance, the IPO issue is expected to get oversubscribe 10 times; the NBFC would ask for a 10 per cent margin (10%). If the issue does get oversubscribed 10 times, then of the 100 shares an investor applied for, he would be allotted 10 shares and balance application ASBA money gets unblocked which gets adjusted against IPO loan and interest thereon. If the loan remains outstanding even after ASBA unblocking then NBFC holds a lien on the allotted shares and investor needs to liquidate the shares on listing and from sell proceeds the balance loan gets repaid. Any sell proceeds over and above the loan repayments gets refunded to investor.
IPO loans are short term loans from the IPO closing day to date of listing of IPO subject to minimum 7 days. Interest rate in case of HNI application of Rs 1 crore and above is about 7.25% p.a. for minimum 7 days normally from closing day of IPO and for application below Rs 1 crore interest rate is 11.5% p.a. If IPO loan remains outstanding beyond listing date IPO and if the allotted shares are to be considered under normal margin funding/LAS facility then funding rate of 7.25% p.a. gets converted to a normal margin funding rate of 12%-16% post day of listing if the investor continues to hold the stock. Margin haircut also would increase depending on scrip categorization under Margin Funding Facility.
Apart from some NBFCs collecting interest upfront, customers typically pay a onetime loan process charge and also a stamp duty for the Loan Agreement and other documents. PL differs in these practices from the typical NBFC in this regard with better terms as PL does not charge loan process charge and there is no minimum size of application conditions etc.
In most cases, the lender takes care of end to end process of IPO application for its customers
who are availing IPO funding. Here are few standard steps:
1. Open Funding Accounts with Lender (One time)
2. Open a Demat Account with Lender or provide pledge from an existing account (One time)
3. Fill forms for IPO funding and provide all required documents (One time)
4. Let lender know about the IPO to invest in, quantity and date.
5. Investor need to sign in IPO form only under “Applicant” section and not under ASBA section
6. Pay the margin or create the security
7. Funds disbursed within 24 working hours of the request, typically on last day of issue
8. The lender apply for IPO share on your behalf – ASBA is done in lender’s bank account
9. Allotted shares are credited in to the NBFC demat account
10. Customer instructs lender to sell the allocated shares on day of listing.
11. Customer settles the profit/losses with the lender and repay loan.
In most cases transactions are settled within 7 days from the date of allotment. But based on the agreement, the settlement can be done up to 90 days with higher applicable margin and interest rate.
Advantages of IPO Funding
1. Investor can apply for more shares, thus increasing chances of a large allotment, especially useful in the HNI category where allotment is on proportionate basis
2. Offers good opportunity to make huge rate of return
3. Cash or securities can be used as margin.
4. Funding cost came down significantly in recent time because of quick IPO listings and reduced interest rates.
5. Simple Documentation and streamlined speedy processing of loans