New IPO funding limit ‘will level the playing field’, say experts

It will be a banner year for the Indian IPO market. In the first six months of the fiscal year, the initial public offerings raised Rs 63,500 crore. With a few mega issues lined up, FY22 will surpass FY18’s Rs 98,984 crore – the highest yet, according to Prime Database.

The central bank’s easy money policies, soaring stock prices, a new breed of investors, and relatively cheap financing have fueled each other and fueled the IPO frenzy.

But at least one of those factors is sure to diminish in force next year when a new Reserve Bank of India rule takes effect. The regulator has just announced a cap of 1 crore rupees on the financing of IPOs by borrower, as of April 1, 2022.

The cap suggests that RBI is concerned about speculative activity in the IPO markets, said Deven Choksey, managing director of financial services firm KR Choksey Investment Managers Pvt.

This will reduce demand, said Dharmesh Mehta, managing director of DAM Capital Advisors Ltd. The oversubscription levels will decrease, but the quality of the portfolio of high net worth investors will improve dramatically, which is good for the issuer in the long run, he added.

Mehta said the RBI cap would “level the playing field” – as it gives unleveraged HNIs the ability to get more stock.

This will also moderate price volatility on the day of the listing, he stressed.

It is a good decision taken by the regulator and in the interest of investors, said Mrin Agarwal, financial advisor and founder of Finsafe India. “We saw a lot of investors going too far by investing in IPOs and using leverage… and not all IPOs really gave them that listing gain or made them a profit,” a- she added.

Many high-profile IPOs, from LIC expected to raise over $ 20 billion to Paytm’s estimated over $ 2 billion bid, are expected to be completed before April. However, this cap could make some of the smaller issuers nervous about demand for the next fiscal year and push them to enter the market earlier.

I don’t think it will impact the mood of the IPO market or valuations, Mehta said. “In fact, this will only be positive as it will help uncover the actual prices on the day of the listing, as the unwarranted leverage sale will not lower the price on the first day.”

Choksey said speculative activity needed to be brought under control some time ago. “In my opinion, SEBI should have restricted IPO fundraising activity a long time ago. It’s a good move.”

To be clear, the RBI regulation puts the cap at Rs 1 crore per borrower, with no stated cap on the number of lenders. So technically an investor could still raise multiple times using multiple lenders. However, this new rule can serve as a retarder if not a red light.