Demand for IPO financing to stay buoyant amid strong pipeline

The demand for initial public offering (IPO) financing is expected to remain buoyant amid a strong issue pipeline. According to ICRA, wealthy investors could borrow up to ~70,000 crore per issue to apply for good large-sized IPOs. Currently, the average demand is between ~17,500 crore and ~22,500 crore per IPO.

Typically, high net worth individuals (HNIs) make leveraged bets in IPOs to make listing-day gains. As the HNI portion of an IPO with high investor interest sees huge demand, investors have to make a big-ticket application in order to increase the chances of allotment. Non-banking finance companies (NBFCs) finance this money by charging interest between 9 per cent and 12 per cent (per annum) for seven days. The average subscription in the HNI portion for IPOs in the past one year has been more than 80 times. For instance, the nearly ~1,900-crore IPO of Avenue Supermarts saw applications worth nearly ~80,000 crore — 278 times the shares on offer — in the HNI category.

“The IPO financing market was very vibrant in 2016-17, supported by an increase in HNI investors’ interest in IPOs in the quest for listing gains. With banks not active in this segment due to regulatory restrictions, the field is dominated by NBFC arms of some of the leading players in the capital markets and wealth management businesses,” said Karthik Srinivasan, senior vicepresident and group head-financial sector ratings, ICRA.

A favourable market outlook and healthy post-listing performance has resulted in a surge in HNI interest towards IPOs. According to ICRA, the median HNI subscription in IPOs in 2016-17 was 80 times, compared with just two times in 2015-16. “This has created a market for providing short-term capital to the HNI investors for funding the IPO application,” the rating agency said.

An investor applying in the HNI category has to provide small upfront capital (called margin money), while the rest is funded by NBFCs.

Industry players say the financing cost has come down after the markets regulator reduced the time taken between the closing of an IPO to listing from 13 days to just seven days. The lower costs have brought down the break-even for HNIs. But, for IPOs such as Avenue Supermarts, which saw massive demand, the break-even costs increases as HNIs have to borrow more.