IPOs can't bank on the rich

Reserve requirements, mandatory investment in G-secs under Companies Act may slow lending for HNI investment in IPOs

The revival of a practice by which brokerages lent capital to high net worth individuals to finance their participation in initial public offerings (IPOs) might be affected by Companies Act norms on how such funds are raised.

Most brokerages carry this out through non-banking financial companies (NBFCs), which might be part of the same group as the brokerage, or through a tie-up with an unrelated entity. New norms in the Companies Act require them to increase reserve requirements and invest a portion of their corpus in government securities (G-secs); this might have an effect on their ability to fund themselves, say experts.

The Companies Act requires NBFCs to create a debenture redemption reserve account to meet redemption obligations within a year. Also, they have to invest 15 per cent of their resources in G-secs.

Prateek Pant, executive director (products & services), RBS Private Banking, India, said operations of capital market NBFCs would be impacted. “The new norms are a significant dampner for NBFCs that use NCDs (non-convertible debentures) for funding operations. This could kill a significant source of funding for capital markets, which includes primary market activity such as investments in IPOs,” he said.

Sandeep Nayak, executive director and chief executive of Centrum Broking, said such entities would get lower returns from their activities. “The need to keep 15 per cent of liabilities in NCDs due within a year in G-secs; yielding lower returns will reduce the resources available to lend. The overall yield on the portfolio could be impacted by 25-75 basis points, depending on the size of the NBFC,” he said.

 

The move comes at a time when investor interest in the primary market has shown signs of a comeback.

The success of the Wonderla Holidays IPO was the first in a long time, attracting investor interest. It received bids for 160 times the shares on offer to high net worth individuals, who were said to have borrowed Rs 4,000 crore to invest in the Rs 180 crore IPO.

At Rs 1,204.82 crore, the funds raised through public offers in 2013-14 were the lowest since 2002-03, according to statistics from PRIME Database.

In a report on the brokerage sector, ratings agency Icra pegged the capital market financing book of the top 18 brokers and capital market NBFCs at Rs 24,200 crore. This included IPO financing, as well as other activities such as loans against shares.

Nayak said at a systemic level, there would be a marginal hit, with some impact on the profitability of NBFCs. “The debenture issue route is an avenue used by NBFCs; but typically, the issuances are 24-60-month tenures. Typically, the debentures due within the next year will be less than five per cent of the total liabilities for most large players,” he said.

WINDOW GETS NARROWER

HOW HNI LENDING WORKS

* HNIs borrow money from NBFCs to invest in IPOs

* Activity has been limited in light of tepid primary market

* Hopes of an IPO financing revival had risen once again

* HNIs said to have borrowed Rs 4,000 crore for investing in the Rs 180-crore Wonderla Holidays IPO

* The Companies Act now requires NBFCs to create a debenture redemption reserve

* They have to invest 15 per cent of their resources in government securities

* New norms may affect lending, according to experts