Borrowing for Upcoming IPOs to Cost Twice as Much

9 February 2023
4 mins read
Borrowing for Upcoming IPOs to Cost Twice as Much

Investors who rely on external funding to subscribe to IPOs may end up paying two times the interest rate than what they used to as RBI is tightening the rules around it. As the demand for funds for this purpose is on the rise and liquidity tightens, the interest rates have amplified from 6%-7% to 12%-13% in the last 2 months. Additionally, with about 12 IPOs set to go live in the next couple of weeks, market experts predict this interest rate will likely surge even more.

Broader Implications of This Surge in Interest Rates

The surge in interest rates will have broader implications on the subscription IPOs in the coming times. Owing to this increase in the coming days, the cost of shares will go up drastically for investors across the board. This is especially true for those who rely on external funding to subscribe for this purpose, i.e. high net investors (HNI).

Here is an example to clarify this matter –

At a 7% interest rate for seven days, the cost of one Nykaa share comes at about Rs. 151. It becomes Rs. 237 per share at 11%, and Rs. 280 when the rate of interest is at 13%.

This means an investor will only make money if shares of Nykaa list at a premium of any price higher than what they have borrowed funds at. However, market experts believe that investors will still get significant returns on their investments even at a rate as high as 12%, as Nykaa’s IPO is likely to receive an oversubscription as high as 100 times.

Resultantly, leveraged bidding is likely to go down, where individuals borrow funds to invest in public issues. Also, once they get listing benefits, they will sell off those shares to pay them back to their financiers. Also, the lack of oversubscription will help in the process of price discovery after listing.

Upcoming IPO Schedule at a Glance

Here is an overview of the companies going public in the coming days –

Company name Date Issue size Price band Lot size
FSN E-Commerce (Nykaa) 28 October – 1 November Rs. 5,352 crores Rs. 1,085-1,125 12
Fino Payments Bank 29 October – 2 November Rs. 1,200 crores Rs. 560-577 25
SJS Enterprises 1 November – 3 November Rs. 800 crores Rs. 531-542 27
PB Fintech (PolicyBazaar) 1 November – 3 November Rs. 5,710 crores Rs. 940-980 15
Sigachi Industries 1 November – 3 November Rs. 125 crores Rs. 161-163 90
One97 Communications 8 November – 10 November Rs. 18,300 crores Rs. 2,080-2,150 NA

Bottom Line

It has been a long time since IPO funding rates have gone up so drastically, owing to massive demand. However, for HNIs, it is a tricky scenario as multiple IPOs are on the cards. Also, such individuals have been aggressive in their borrowing strategy, reflected in the oversubscription figures of the previous IPOs. Nonetheless, stringent norms are coming into effect from the next financial year. RBI has issued guidelines, capping the IPO lending for NBFCs at Rs. 1 crore.

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Frequently Asked Questions

  1. What is the prescribed concentration limit for non-banking financial companies with this change of regulations by the RBI?

The prescribed concentration limit with this regulation change includes –

  1. Merging investment and lending into a single exposure limit of 25% for a single investor
  2. This becomes 40% for groups or parties
  3. Will this change of regulations affect the structure of NBFCs?

No announcement regarding any changes to the structure of NBFCs has been specified in this regulation change by the RBI.

  1. What is the ASBA process?

ASBA or Application Supported by Blocked Amount is a process of applying for IPO curated by the Securities and Exchange Board of India. Under this process, the allotted funds are not debited until required shares are allocated.