RBI's IPO financing norms tweak to deepen primary markets, say analysts

The tweak in the financing norms comes as the primary market is booming with new issues and listings despite a weak secondary market

In a bid to enhance and ease the capital market fundraising, the Reserve Bank of India (RBI) announced multiple measures, including increasing the initial public offering (IPO) financing limit to ₹25 lakh per person from ₹10 lakh earlier.

 

Along with enhancing limits for lending by banks against shares to ₹1 crore from ₹20 lakh earlier, RBI Governor Sanjay Malhotra while announcing the monetary policy decision on Wednesday, said that the RBI will remove the regulatory ceiling on lending against listed debt securities. This was part of the five measures that the central bank announced after keeping the benchmark repo rates unchanged at 5.5 per cent in the October meeting.

   

The Governor proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates and proposed to withdraw the framework introduced in 2016 that disincentivised lending by banks to specified borrowers.

 

The RBI proposed to reduce the risk weights applicable to lending by non-banking financial companies (NBFCs) to operational, high-quality infrastructure projects and proposed to publish a discussion paper on licensing of new Urban Co-operative Banks (UCBs).  ALSO READ | Rate sensitive shares trade firm as RBI keeps repo rate unchanged; PSBs dip

Focus on IPO Financing

In simple words, IPO financing refers to loans offered by financial institutions to investors who want to apply for shares in an IPO but do not have sufficient funds. The borrowed amount is secured against the allotted shares, which act as collateral until the loan is repaid, typically after listing, when the share value appreciates.

 

The measures, said V K Vijayakumar, chief investment strategist at Geojit Investments, will help widen the scope for investors subscribing to the issues in the primary market. "This is a measure by the RBI to increase investor participation and will deepen the primary markets in the long run," he added.

 

This measure could bring in new investors with less capital into the primary market and can also be used by high HNI investors to leverage their capital to secure a larger share in an IPO, analysts said. However, there is a catch to that as well. In case of oversubscription, the company allocates shares on a proportionate basis, where every investor receives shares in the same ratio as the total subscription.

 

At first glance, the RBI’s decision to raise the bank lending limit against shares and increase IPO financing appears positive for market depth, according to Ambareesh Baliga, an independent market analyst. "But in reality, it may not lead to a significant change."  ALSO READ | Should you avoid rate-sensitives stocks as RBI MPC holds policy rates? 

The way allotment works now, whether an investor applies for ₹10 lakh or ₹1 crore in an IPO, both fall into the same bucket, so the chances of getting an allotment are almost the same, Baliga explained. Earlier, larger applications had a clear advantage, but that edge no longer exists because of the current allocation algorithm. "This means investors don't really gain much by borrowing large sums, especially when they also have to pay interest on leveraged positions," he suggests.

 

So while the move looks good on paper, in practice it won’t materially alter IPO participation—unless we’re dealing with undersubscribed issues, where additional financing can actually make a difference, Balliga added. "But loan against shares is positive as it will allow further borrowing for secondary market investment." 

The RBI’s move to raise bank lending limits against shares and IPO financing addresses a long-pending requirement, said Deven Choksey, managing director of DRChoksey FinServ. "This step brings much-needed rationality."

 

The IPO financing increase may also curb the grey market activity, as many investors were resorting to it to secure allocations, Choksey said. "More importantly, what stands out is the alignment between RBI and Sebi — for the first time in a long while, both regulators appear to be moving in sync."

 

The tweak in the financing norms comes as capital markets are booming with new issues and listings despite a weak secondary market. The pipeline positions this year’s IPO fundraising to challenge the 2024 record of ₹1.6 trillion. If achieved, it would mark only the third instance, after 2021 and 2024, of annual mobilisation surpassing ₹1 trillion.