IPO Fund­ing

Dalal Street Investment Journal - - COVER STORY -

IPO in­vest­ing is an age-old prac­tice which pro­vides an op­por­tu­nity for in­vestors to book some short-term prof­its. IPOS are one of the most re­ward­ing in­vest­ment op­tions for re­tail in­vestors. Th­ese days, a de­cent list­ing on the bourses helps in­vestors gain good amount of re­turn in just about 6 to 10 days only. How­ever, in­vestors have been com­plain­ing lately on the al­lo­ca­tion of shares, es­pe­cially about those is­sues that are over­sub­scribed.

One of the ways to im­prove your chances of get­ting higher al­lo­ca­tion is ap­ply­ing for large chunk in high net worth in­di­vid­ual (HNI) cat­e­gory. The al­lot­ments are done in a pro­por­tion­ate ba­sis in case of over­sub­scrip­tion for HNIS.

IPO fund­ing or IPO fi­nanc­ing is one way of par­tic­i­pat­ing in IPOS to max­imise prof­its for HNIS. IPO fund­ing is a sim­ple loan of­fered by the NBFCS for ap­ply­ing to the IPO is­sue(s). In IPO fund­ing, an in­vestor has to just de­posit mar­gin money and the rest of the funds are loaned by the NBFC at in­ter­est rate rang­ing from 8 per cent to 12 per cent per an­num (rate varies as per the len­der).

Sev­eral of the NBFCS are in­volved in se­cu­rity-based lend­ing busi­ness, while it is ob­served that most of the NBFCS in­volved in se­cu­rity-based lend­ing busi­ness are part of stock bro­ker­age firms.

As men­tioned ear­lier, IPO fund­ing is for the short term and, in most cases, it is for 7 to 10 days and the re­pay­ment ten­ure for such kind of loans is up to three months. In­vestor opt­ing for IPO fund­ing has to pay an up­front pro­cess­ing fee which varies from one len­der to another. Apart from the up­front pro­cess­ing fees, the bor­rower has to pay other ex­penses such as stamp duty for loan agree­ment and for other doc­u­ments as ap­pli­ca­ble.

The bor­rower sim­ply has to pay the mar­gin money and the re­main­ing funds are ar­ranged by the len­der. Usu­ally the ticket size is large for such lend­ing and the fi­nance amount varies with the len­der and the IPO. The loan amount runs into crores in most cases for the HNIS. Some of the NBFCS that are part of large broking group of­fer IPO fund­ing with ticket sizes rang­ing from 1 lakh to 18 crore, while few lenders have

1 crore as the min­i­mum loan amount. Axis Fi­nance is one of the IPO fi­nancier and has min­i­mum loan amount of 25 crore for such ac­tiv­ity (as per com­pany web­site).

For the first time in­vestor, i.e. an in­vestor opt­ing for IPO fund­ing, the process can be daunt­ing. Says Gau­tam Munot, an

HNI in­vestor who had re­cently opted for IPO fund­ing, “IPO fund­ing may not be easy for the first timer as the doc­u­men­ta­tion takes time. The doc­u­ments need to be ready as you don’t have much time in hand. I think IPO fund­ing should be used care­fully as it in­volves pledg­ing of shares. How­ever, it is a use­ful fi­nance fa­cil­ity and helps me op­ti­mise re­turns on IPOS”.

Apart from the nor­mal KYC doc­u­men­ta­tion and fi­nan­cial doc­u­ments, the bor­rower has to fol­low the end-toend process of IPO fund­ing In­vestors find the IPO fund­ing ad­van­ta­geous be­cause the IPO fund­ing al­lows in­vestors to ap­ply for more shares and in­crease their chances of higher al­lot­ment. For suc­cess­ful list­ings, the profit mar­gin is high in the short term and, at the same time, the risk is sig­nif­i­cantly high when the list­ing does not hap­pen at a pre­mium. Another big ad­van­tage of IPO fund­ing is that the cash or se­cu­ri­ties can be used as mar­gin. As the IPOS get listed quickly th­ese days, the fund­ing cost comes down dras­ti­cally and the low in­ter­est rates en­vi­ron­ment also helps.

On the neg­a­tive side, IPO fund­ing can back­fire when the list­ing is poor for the IPO. Things can go wrong even if both the bor­rower and len­der as­sess IPO in­vest­ing op­por­tu­nity care­fully af­ter scan­ning through the his­tor­i­cal data and mar­ket trends, grey mar­ket pre­mium and is­sue sub­scrip­tion de­tail. List­ing at a dis­count for the IPO is­sue will mag­nify the losses for in­vestors.

Also, in­vestors do not know ex­actly how many shares will be al­lot­ted. There is al­ways a pos­si­bil­ity that in­vestor does not get enough al­lot­ment of shares even if the share gets listed at a pre­mium. In such cases also, there is a chance that the bor­rower will have to book losses. As­sess­ing the var­i­ous as­pects of IPO fund­ing, this fi­nan­cial in­stru­ment can be said to be a good friend of HNI in­vestor who is mar­ket savvy and has a very good un­der­stand­ing of how eq­uity mar­ket per­forms and the risks in­volved. IPO fund­ing is for high-risk in­vestors and def­i­nitely not for risk-averse in­vestors.

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