New RBI proposal for NBFC funding in IPOs to help primary issues in restoring sanity (Opinion)

By Arun Kejriwal The Reserve Bank of India issued a discussion paper last Friday on regulations concerning NBFCs. The crux of these regulations is to reduce significantly the arbitrage between NBFCs and banks. The other area of significance is IPO funding where currently it is a free for all with NBFCs employing as much as Rs 75,000-80,000 crore in this activity whenever there is an IPO. RBI has now proposed a cap of Rs 1 crore per person.
The system as it exists today is that an individual can apply for the entire non-institution portion of an IPO.
Let us take the recent case of the IPO from Indigo Paints which was to raise Rs 1,170 crore.
An HNI could apply for half this issue which consisted of HNI and retail for Rs 585 crore individually. The amount of money he would have to put up to make an application of Rs 585 crore would be just 1 per cent or Rs 5.85 crore. Does he have the resources? Not required. All he needs to do is pay a margin of 1 per cent and the interest for borrowing this money which in this case works out to Rs 78.53 lakh upfront. The NBFC concerned will make an application for Rs 585 crore which works out to 38.91 lakh shares. Looking at the oversubscription of 263.05 times, he would be allotted 15,000 shares which would cost him an average interest of Rs 525.
Who are these NBFCs who are willing to take such a risk? Most of them are associates of the merchant bankers. They are more than happy making a joint application or an application under power of attorney, from the borrower. The money does not technically leave the bank where there is a joint account. The money is just blocked under “ASBA”. Post the allotment and deducting the value of shares allotted, the balance of the upfront margin is refunded. The margin decided is on the basis of number of times that the HNI portion is likely to be subscribed.
In the case of Indigo Paints, the issue was subscribed 263 times which meant that for an application of 1 lakh shares, only 380 shares would be allotted. The applicant has given a margin of 1 per cent which corresponds to payment for 1,000 shares. The coverage is almost three times.