Smaller NBFCs smell big opportunity in IPO financing

Many smaller NBFCs are expected to enter the estimated Rs 80,000-crore short-term lending industry after the RBI put a lending cap of Rs 1 crore on NBFCs for share purchase in initial offers. The Economic Times reported, quoting Tushar Bopche, Co-founder of BrainStation India, that small lender will have greater options to lend to investors looking to subscribe to shares under the new rule.

In the absence of exorbitant bids, long-term rich investors buying for less than Rs 50 lakh in an IPO can now have bigger allocations, the report said, quoting dealers.

NBFCs

The Reserve Bank of India (RBI) said on Friday that NBFCs cannot lend more than Rs 1 crore to investors looking to purchase equities in initial public offerings (IPOs) from April 1 next year.

Wealthy investors borrow money from huge NBFCs, which charged greater rates based on the amount of money they needed. Commercial papers, or shorter-term debt securities with a maturity of seven to ten days are used by NBFCs to borrow.

For IPO financing, an NBFC can either sell CPs or employ internal resources.

The Economic Times report quoted Raman Agarwal, Area Chair – NBFCs, Council for International Economic Understanding (CIEU), as saying that IPO finance is a high-risk leverage business with huge profit margins.

These investors make informal negotiations with possible long-term buyers before the first day of the listing and complete transactions on the first day of the listing. This, combined with high subscription bids, is claimed to be causing unusual listing gains.

Smaller businesses may find it difficult to raise funds because finance costs are greater than at top-rated NBFCs providing CPS.

The report quoted Karthik Srinivasan – group head of financial sector ratings at ICRA as saying that while larger NBFCs are more active in IPO financing, smaller NBFCs may enter this area depending on how they handle money mobilisation problems.