Shorter IPO timeline to squeeze funding margins

By reducing the time between an issue’s closure and listing, the Securities and Exchange Board of India (Sebi) has killed two birds with one stone.

Besides ensuring faster primary market issues, the move will tame the initial public offer-funding business, which has been attracting a lot of criticism. Market players say that while the business is already in the doldrums due to some recent lacklustre listings, the Sebi order has further squeezed margins, even though money can be churned much faster now.

IPO funding is a practice of investing in public issues with borrowed money. It is a lucrative avenue for brokers, especially those that have a non-banking financial company (NBFC). Typically, it is high net worth individuals who take short-term credit from NBFCs. The interest costs, over 15 per cent in 2008, are already down to under 10 per cent.

Now, with the IPO timeline down to 12 days from May 1, income in absolute terms will fall further. “With QIBs (qualified institutional buyers) having to pay 100 per cent money with the application from May 1 and Asba (application supported by blocked money) facility extended to all categories, it appears the rules of leveraged application will undergo a sea change,” said Arun Kejriwal of KRIS. “Interest rates have to fall drastically for them to be affordable in the new regime. The first few issues will be keenly watched,” said Kejriwal.

IPO funding has been facing criticism from many quarters, including the market regulator. During the IPO boom years of 2005-2007, when the activity was at its peak, there were a number of complaints against NBFCs and brokerages. The most common issue related to the power of attorney (PoA) vested with the lender. In case the investor defaulted on payment, the PoA gave the broker the right to sell the shares. Such instances were common, especially when shares listed below the issue price or listing gains were minuscule.

Sebi’s first salvo against the practice came in the form of ASBA, wherein the money remains in the bidder’s account till the shares are allotted. Self-certified syndicate banks were appointed to enhance the reach and popularity of Asba, which leaves no room for brokers to fund IPO applications. According to Sebi’s analysis, applications through this facility accounted for around 12 per cent of the total in some of the issues that hit the market last year.

Interestingly, some market players have taken a contrarian stand on IPO funding. They say since the cost of funds will come down, more investors will now look at this avenue. “The new norms will widen the positive spread for investors and so the demand for money will go up,” said Nandip Vaidya, president (retail broking), India Infoline. “Brokerages need not worry as even though margins will shrink, higher volumes will negate any probable drop in income. I feel the credit offtake will definitely go up,” said Vaidya.