NBFCs readying a war chest of close to Rs 2 trillion to fund IPO bets

Non-banking financial companies (NBFCs) are readying a war chest of close to Rs 2 trillion to lend to high networth individuals (HNIs) for fuelling their IPO wagers. According to industry sources, a huge demand for capital amid an initial public offering (IPO) rush has led to a rise in funding cost to as much as 13 per cent from less than 10 per cent levels.

Five companies are looking to mop up over Rs 31,000 crore cumulatively between October 28 and November 10. Industry players expect Nykaa to be the biggest draw. Its IPO is expected to generate bids between Rs 80,000 crore and Rs 90,000 crore in the HNI category.

The online beauty start-up could crowd out others such as Fino Payments Bank, PolicyBazaar, and SJS Enterprises, which are launching their IPOs around the same time. The exact demand for Paytm’s Rs 18,300-crore IPO is not known yet as the company has just announced its dates.

“There seems to be a shortage of funds. Many clients are complaining that funding is not freely available and NBFCs are asking for an interest rate of 13 per cent,” said an official with a brokerage.

Typically, HNIs borrow at 8 to 10 per cent from NBFCs to place leveraged bets in IPOs.

NBFCs issue seven-day commercial papers (CPs) to meet this funding requirement. The CPs are issued at 5.5 to 6.5 per cent. Industry players said the huge borrowing requirement had also led to a 100-200 basis points increase in CP rates.

Debt mutual funds (MFs) are usually subscribers of these CPs. “Liquid MFs typically invest in ultra-short-term instruments that yield 4 per cent. For them, this is a good opportunity to earn a higher coupon,” said a bond market dealer.

Industry sources said Bajaj Finance, Kotak Securities, IIFL, JM Financial, and Motilal Oswal are among NBFCs that are looking to borrow, or have borrowed, from the CP market to lend to HNIs to apply for IPOs of Nykaa and others.

“HNIs are expected to bid aggressively for Nykaa as the grey market premium is in the excess of 50 per cent. Most HNI bets have paid off really well in the case of Zomato. This has kept the mood buoyant,” said the brokerage house official quoted earlier.

A successful wager through the HNI category requires a lot of forecasting of demand and listing gains. However, the buoyancy in the market and huge listing day gains made by IPOs in the past one year has ensured that most bets have paid off.

“In the last one year, we have seen a healthy demand for IPOs, and the line-up has been robust. The activity has increased significantly as we head closer to Diwali. Funding rates have shot up as many large sized IPOs are scheduled within a short span of time. Investors should prudently choose the IPO based on USP and risk measurement. We encourage and recommend our customers to invest in an IPO based on solid research to begin the journey in equity investment,” said Suvajit Ray, head of products, IIFL Securities.

However, April 2022 onwards, the HNI investing could undergo a change as the Reserve Bank of India has proposed to impose a Rs 1 crore cap on IPO funding by NBFCs. Industry players say they will have to wait and see if any new models emerge for IPO funding. If not, only family offices and corporate treasuries, which can apply using their own funds, could benefit at the cost of HNIs.