Firms may consider bringing forward IPO plans, says Ind-Ra

Our Bureau Mumbai | Updated on October 28, 2021

Nascent stage of recovery amid the fear of pandemic will require continued support from the policy makers, it says

The Reserve Bank of India’s (RBI) capping of individual borrower’s limit for non-banking finance companies (NBFCs) to ₹1 crore for initial public offering (IPO) financing would affect the oversubscription of IPOs and reduce the issuances of commercial papers, per a report by India Ratings (Ind-Ra).

It believes some companies would consider bringing forward their IPO plans, leading to increased IPO pipeline, before the regulation comes into effect in April 1, 2022.

As per the revised regulatory framework for NBFCs, there would be a ceiling of ₹1 crore per borrower for financing subscription to initial public offering (IPO).

The credit rating agency expects this cap on individual borrower’s limit for NBFCs could restrict the use of IPO financing as a tool by large high net-worth individuals (HNI) and institutions for equity market participation and garner listing gains, along with lowering subscriptions for forthcoming IPOs post the regulation gets implemented.

Ind-Ra assessed that the current size of IPO market varies based on the oversubscription and size of issuances which could run up to ₹1 crore. It opined the IPO funding opportunity was limited to only select few large NBFCs and this regulation could end up distributing the business among several players.

The agency believes the nascent stage of recovery amid the fear of pandemic will require continued support from the policy makers.

“Therefore, it would be necessary for the RBI to maintain the easy money condition for some more time, although in a moderate way. Concomitantly, the impact of sustained easy money condition needs to be monitored for ensuring stability in the financial market,” it said.

“The step to curb leveraged investments in the equity market public offer is a part of the prudent market micro structure management in line with safeguarding financial market stability,” said Soumyajit Niyogi, Associate Director.

Ind-Ra expects the new regulations could lead to broad basing of equity participation with inclusion of retail borrowers through this category. Earlier, brokers targeted HNIs for the ease of operations and a quick turnaround. This regulation also could lead to a rise in operating expense for reaching out a large client base to maintain participation levels.

HNIs take very high exposure under IPO financing product, where per borrower exposure can go up to ₹150 crore or based on single-party exposure limits, leading to heightened demand through oversubscriptions in that category, the agency said.

Niyogi said, “NBFCs made spreads of 3-4 per cent, depending on the demand level in the issuance. This spread remains or could widen with broader participation; however, there could be a moderation in the overall profit pool with a fall in oversubscription due to the new regulation getting applied from April 1, 2022.”

Liquidity coverage ratio

Referring to liquidity coverage ratio (LCR), which is at 50 per cent for NBFCs, increasing to 60 per cent in December 2021 and 100 per cent by December 2024, Ind-Ra said this will also impact IPO financing for large players as post March 2022, LCR computation would be based on simple average of daily observations.

This would require holding of proportionate cash and liquid investments or unutilised lines for same time period to comply with LCR requirements.

Consequently, the spreads made in IPO financing would reduce, if factoring in the negative carry on liquid investments carried for complying with LCR for the same time period.

Also, LCR moving to 100 per cent by December 2024 could lead to a rise in the cost of financing, impacting overall participation through the IPO financing market.

The agency noted that the months of June, July and August 2021 witnessed increased activity in the IPO market and concomitantly NBFCs were aggressively funding IPOs. Since September 2021 there have been a lower number of IPOs, the commercial paper market thus has seen a lower demand, leading to lower rates.

Published on October 28, 2021

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