When measures are taken to mitigate systemic risks in the future – it is often labelled as ‘draconian’ and many blame the regulators for spoiling the party. Its like a pouting child who has been pulled up for mischief; the parent knows what needs to be done to prevent a disaster in the future but the child just feels miffed and angry.

That’s how the IPO market and investors, especially the HNIs are feeling. Given the kind of mad ‘listing’ frenzy in the primary market, the way in which IPOs get subscribed with HNIs portion, 99% of the times, showing the highest subscription; regulation was needed.

Starting 1st April 2023, SEBI has stipulated that Non-banking finance companies (NBFCs) cannot lend more than Rs 1 crore to investors seeking to buy stocks in IPOs.  This means that subscriptions numbers for the high networth individual category could be much lower from next fiscal. But from now till 31st March 2022, the IPOs of Paytm and Nykaa, the party will continue.

HNIs, typically borrow from NBFCs for investing in IPOs – this is leveraged buying, the moment the stock is listed, on day one itself, the HNIs exit, making a killing, while completely skewing the entire price discovery process. HNIs are said to be borrowing even as much as Rs100 crore and this will get clipped to Rs.1 crore.

HNIs currently borrow as much as Rs.70 to Rs.100 per IPO from NBFCs for seven days, carrying interest rate of 7 to 8%. They sell on listing day and the money borrowed goes back to the NBFCs. HNIs put in 1% of their capital to ensure than the NBFCs do not incur losses and if the loss is more than 1%, it is usually recovered from the investor’s funds.

This sweet arrangement worked well for everyone but then foresight is better than hindsight. Such kind of funding distorts the complete price discovery process of an IPO because the HNIs are there just for the listing gain; they bid aggressively, artificially pushing up demand and thus the grey market premiums too, ensuring better listing gains.

With this limit now of Rs.1 crore, most certainly the HNIs will come up with ways to circumvent – multiple accounts with multiple NBFCs might be the way out unless of course RBI disallows opening of accounts for this purpose with multiple NBFCs.

IPO markets might now see a rush as many big-ticket ones might want to finish their issues before this rule kicks in in FY23. For NBFCs this is a huge money spinner and with RBI putting a spanner, they might have to think anew from next fiscal.

RBI has done the right thing by putting an end to this mad, mad speculation in the primary market!