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.