On September 18, market regulator SEBI said companies will have to list their shares on the third day after the successful applicants have been allotted shares. Earlier, companies could do so on the sixth day after allotment.
The frothy initial public offering (IPO) financing market at the time of the D-Mart public issue in early 2017 has since sobered down. Tepid listing day gains meant investors who had bid for shares in the IPO using borrowed funds often suffered a loss as the listing day gains did not cover the cost of funding.
IPO funding (or IPO financing) is a loan offered for applying in the primary stock market by non-bank finance companies (NBFCs) to retail, high net worth individuals (HNI) as well as corporate entities. The investor pays only a small margin for applying in the IPO and the lender provides the rest.
If the issue lists at a premium the investor earns a handsome return that more than covers the interest cost on the borrowed fund.
For the NBFC or the lender, while the borrowing is from the wholesale market, the margin is made by way of interest earned from the client and the float that the money enjoys, more from the latter as the money is typically lent to clients for 7 days at an interest rate of 7-8 percent.
IPO funding usually takes off in a bull market when there are high expectations of listing gains, leading to a virtuous cycle whereby a leveraged trade adds to the demand and pushes prices higher.
On September 18, the Securities and Exchange Board of India (SEBI) said companies will have to list their shares on the third day after the successful applicants have been allotted shares. Earlier, companies could do so on the sixth day after allotment.
Is it a good or a bad news for IPO financiers? While there is no straight answer, in the current milieu it may not be music to their ears.
Firstly, listing gains are not given for most issues and even if the issue is of a great quality, market volatility can always impact the listing price.
With the new SEBI directive, the requirement of the leveraged fund for applying to the IPO will get shortened to three to four days from seven days. Financiers are not sure if there will be an appetite for funds for such a short tenure. Only if the issue is extremely lucrative and the listing gains are huge will the borrowers (investors in the IPO) be willing to pay a reasonably high interest rate.For the lender, raising money for such a short tenure may not be easy and can be costly. Even if the money is raised for a period of say seven days, the borrower would want it for a shorter tenure and the financier will have to find a profitable avenue to deploy the money for the remaining three days. The cost to benefit may not work favourably.