Unveiling the HNI Tactics in India’s IPO Market

The Indian Initial Public Offering (IPO) market has witnessed a surge in recent years, fueled by high investor interest and promising companies. However, this enthusiasm has also raised concerns about accessibility and potential manipulation. To address this, the Reserve Bank of India (RBI) implemented a cap on the amount Non-Banking Financial Companies (NBFCs) could lend to borrowers for IPO subscriptions, setting a limit of ₹1 crore per borrower in October 2021.

This regulation aimed to curb excessive leverage and prevent unhealthy speculation in the IPO market. However, recent reports suggest that some High Net-worth Individuals (HNIs) have found ways to circumvent this restriction.

The Multiple Account Method

Market sources have revealed that HNIs are allegedly resorting to opening multiple accounts with different NBFCs to bypass the Rs 1 crore limit. This strategy allows them to borrow the maximum permissible amount from each NBFC, effectively exceeding the intended cap and gaining a larger pool of funds for IPO investment.

Modus Operandi of HNI

HNIs open several accounts with the NBFC under the names of their employees, family offices, businesses, and other relatives.

The client must provide a specified amount as a margin in order to receive IPO funding. Depending on how frequently the NBFC anticipates the issue to be oversubscribed, this could range from 1 to 10%. A lower subscription amount results in a bigger customer margin. On the other hand, if a high subscription volume is anticipated for the issue, the margin collected will be less.

For the simple reason that applicants will receive fewer shares the more times the issue is subscribed to. Thus, in the event that the IPO fails during listing, a smaller advance margin will be sufficient to cover any potential loss.

The LAP route

The HNIs first open several accounts with the same NBFC, after which they apply for loans against shares (LAS) or loans against property (LAP). Due to the collateral backing the loans, nothing in this situation is prohibited.

Following the money’s distribution to various accounts for the upfront margin, each of those accounts submits an application for funding for an IPO.

Concerns and Implications

This practice raises several concerns for the IPO market and financial stability:

• Unequal Access: The ability to exploit loopholes like the multiple account method can create an uneven playing field. Retail investors who need more resources or knowledge to utilise such strategies are left at a disadvantage compared to HNIs with access to multiple NBFCs.
• Market Manipulation: Increased leverage through bypassing the limit can potentially lead to artificial demand inflation in IPOs. This can distort the true market value of the company and create a bubble that could burst, causing significant losses for unsuspecting investors.
• Financial Risk: Borrowing large sums for IPO investments carries inherent risks. If the IPO underperforms or the market takes a downturn, HNIs may face difficulties repaying the loans, potentially impacting the financial stability of NBFCs.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.