Interested in initial public offerings, but don’t have money to take a large exposure? You could try getting IPO funding. Here’s what you need to know
It is estimated that Initial Public Offerings (IPO) worth more than Rs 30,000 crores are in the pipeline. Most of these public issues are from the financial services segment. As you might know, CSB Bank IPO recently hit the market, and was oversubscribed 87 times. Other IPOs or public issue of shares that are waiting in the wings include SBI Cards and Payment Services, Ujjivan Small Finance Bank, Angel Broking, Bajaj Energy, IREDA, Senco Gold and Annai Infra Developers. IPOs that got listed in the share market last year have not done very badly. And IPOs like IRCTC that listed with a spectacular gain and continues to do well have perked up big investor interest in the primary market.
Interested in investing in the public issues of shares, but don’t have much money? Then don’t worry, you can access IPO funding. IPO funding or financing is a loan offered by mostly Non-Banking Finance Companies (NBFC) for applying in the primary stock market. The loan is offered to retail investors, High Net worth Individuals (HNI) as well as firms. You need to pay only a small margin for applying for the IPO and the rest of the amount will be funded by the lender. Here are the details you need.
To avail the loan, you will have to pay the margin amount upfront. The margin amount will differ based on the IPO’s subscription expectations. For instance, if the IPO issue is expected to get oversubscribed by 12 times, the lender will ask you for a 12 per cent margin. If the issue does get oversubscribed by 12 times, you might get 12 shares if you had applied for 100 shares. If you applied using ASBA, the balance ASBA money will get unblocked and this gets adjusted against your IPO loan and the interest payable for the loan.
If you have outstanding loan amount even after ASBA has been unblocked, then the NBFC will put a lien on your allotted shares. You will then have to liquidate the shares after it is listed, get the sell proceeds and use it to pay the balance loan. If there are any sell proceeds over and above the loan repayment, it will be refunded to you.
The IPO loan margin account can be funded using cash deposited in the account or you can provide approved securities.
The lender will take care of the IPO application process for you. Here’s how the process works:
• You need to open a loan account with the lender
• Open a demat Account or provide Power of Attorney (PoA) for an existing demat account
• Fill IPO loan application form
• Provide all required documents
• Provide the details of the IPO issue you are interested in along with the date of IPO and quantity you want to buy.
• Pay the margin in cash or using shares
• Loan amount will be disbursed within 24 working hours of the loan request
• The lender will apply for IPO issue on your behalf.
• Your money will get blocked while the allotment is in progress.
• Once the allotted shares are credited in to your demat account, money will be withdrawn for the allocated shares.
• You can instruct lender to sell the allocated shares.
• You can settle the profit/loss with the lender
Lenders might require that transactions be settled within seven days from the date of allotment of the shares. However, some lenders extend the settlement to 90 days if you provided higher margin and are paying more interest.
Most NBFCs that offer IPO loans are part of a large stock brokerage firm or bank. Some of these NBFC companies include:
• Sharekhan Financial Services Private Limited
• ECL Finance Limited (Edelweiss)
• JM Financial Products Limited
• Aditya Birla Finance Ltd
• Moneywise Financial Services (SMC Finance)
• Axis Finance Limited (Axis Bank)
IPO loans are short-term loans. Most of the times these loans are for seven days. The tenure of the loan is from the IPO closing day to the date of listing of the shares. You could get up to three months to repay the loan. Most lenders allow you to hold or sell the shares based on market trends and the nature of the shares that were purchased.
The interest for IPO loans could be anywhere between 8% and 12% depending on the NBFC. Note that the lender will earn interest from the money that’s in the bank account until the shares are allotted.
The interest rate for loans of Rs 1 crore and above is lower. If IPO loan remains outstanding even after the shares are listed, then the interest rate might get hiked to 12%-16% if you hold the shares after the listing. Margin amount could increase depending on the categorisation of the shares under the Margin Funding Facility. Some NBFC might collect the interest upfront.
Coming to charges, you might need to pay a one-time loan process fee of Rs. 1,000 – Rs. 2,000 and stamp duty for the loan agreement.
Even though the loan amount varies, most NBFC provide loans starting at Rs 1 lakh. You could get a loan of several crores if you are a company borrowing to invest in an IPO. For instance, Sharekhan offers loans of up to Rs 18 crore while Aditya Birla Finance offers a minimum loan amount of Rs 1 crore.
Here’s the criteria that NBFCs look at:
• The borrower should be an individual/ HUF/Corporate/Partnership firm
• The applicant should have a valid PAN card
• The applicant has to open a bank account specifically for the IPO loan. The borrower has to create PoA in favour of the lender. The borrower cannot use this account once he gives PoA to lender
• The borrower has to give PoA for demat account too
The documents that you need to submit include:
• Identity proof
• Address proof
• Income Tax Return (ITR)
• In case of company, you need to provide the shareholding pattern or partnership deed
Got enough money for applying to IPOs? Then, you could use your UPI account to apply. Read this article of the details:
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