HNIs use multiple-account route to bypass RBI’s Rs 1-crore limit on IPO funding by NBFCs
High net-worth individuals (HNIs) have been routinely circumventing the Rs 1-crore limit set by the Reserve Bank of India for funding of initial public offerings (IPOs) by NBFCs, market sources told Moneycontrol. They have been doing that by opening multiple accounts with the non-banking finance companies (NBFCs), of which they are the ultimate beneficiary.
To curb the frenzy in the IPO market fuelled by money borrowed from NBFCs, the RBI imposed a ceiling of Rs 1 crore on the amount that NBFCs can lend a borrower for an issue, effective April 1, 2022.
It may have helped, to an extent, temper the previously massive subscriptions in the bigger sized IPOs but has done little to dampen the craze for IPOs of small and micro (SME) enterprises.
Moneycontrol spoke to some of the HNIs who invest in IPOs using borrowed funds and this is how the “system” operates:
HNIs open multiple accounts with the NBFC in the name of family members, their firms, family offices, trusts and even employees.
IPO funding requires the client to put up a certain amount as margin. This may vary between 1 and 10 percent; depending on how many times the NBFC expects the issue to be oversubscribed. Lower the subscription, higher is the margin collected from the clients. Conversely, the margin collected is lower if the issue is expected to see heavy subscription.
Reason being, higher the number of times the issue is subscribed, lesser the number of shares that will be allotted to applicants. So a lower upfront margin will be enough to cover any potential downside if the IPO flops on listing.
Say the client has put up a margin of Rs 50,000 and is allotted shares worth Rs 2 lakh, the NBFC is covered even if the stock falls 20 percent on listing.