New IPO Financing Limit Will 'Level The Playing Field', Say Experts

It will be a record year for India's IPO market. In the first six months of the fiscal, initial public offerings have raised Rs 63,500 crore. With some mega issues lined up, FY22 will surpass FY18's Rs 98,984 crore - the highest so far, according to Prime Database.

Central bank easy money policies, galloping stock prices, a new breed of investors and relatively cheap finance have fueled each other and the IPO frenzy.

But atleast one of those factors will definitely diminish in strength next year when a new Reserve Bank of India rule kicks in. The regulator has just announced a Rs 1 crore cap on IPO financing per borrower, effective April 1, 2022.

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

It will reduce demand, said Dharmesh Mehta, managing director of DAM Capital Advisors Ltd. The levels of oversubscription will reduce, but quality of the high networth investor book will improve dramatically, which is good for the issuer in the long term, he added.

Mehta said RBI's cap will "level the playing field" - as it gives unleveraged HNIs an opportunity to get allocated more shares.

It will also moderate listing day price volatility, he pointed out.

It’s a good move made by the regulator and is in the interest of investors, said Mrin Agarwal, financial advisor and founder of Finsafe India. "We were seeing a lot of investors going overboard investing in IPOs and using leverage... and not all IPOs were really giving them that listing gain or giving them a profit," she added.

Many marquee IPOs, from LIC which is expected to raise over $20 billion to Paytm's estimated over $2 billion offer, are expected to be done before April. Though, this cap could make some of the smaller issuers nervous about demand next fiscal and push them to market sooner.

I don’t think this will have any impact on the IPO market mood or valuations, Mehta said. "Infact it will be only positive as it will help in real price discovery on the listing day as undue leverage selling won't push the price downwards on day one."

Choksey said the speculative activity needed tamping down a while ago. "According to me SEBI should have restricted the IPO funding activity long time back. This is a good decision."

To be clear, the RBI regulation puts the cap at Rs 1 crore per borrower, with no stated cap on number of lenders. So technically, an investor could still lever up many times using several lenders. Yet, this new rule may serve as a speed breaker if not a red light.