NBFC Regulations dated 22.10.2021 - A good move by RBI

Check the below facts of some 2021 successful IPO's

Paras Defense and Space Technologies Limited - Issue Size 170.78 crores

IPO was oversubscribed overall by 304 times.  Category wise over subscription - Qualified Institutional Buyer (QIB) 170 times, High Networth individuals (HNI) 928 times, Retail investors (RI) 113 times

IPO Price - Rs.175; Listing day price Rs.498.75

MTR Technologies Limited - Issue Size 596.41 crores

IPO was oversubscribed overall by 201 times.  Category wise over subscription - Qualified Institutional Buyer (QIB) 165 times, High Networth individuals (HNI) 651 times, Retail investors (RI) 28 times

IPO Price - Rs.575; Listing day price Rs.1082.25

Tatva Chintan Pharma Chem Ltd - Issue Size 500 crores

IPO was oversubscribed overall by 180 times.  Category wise over subscription - Qualified Institutional Buyer (QIB) 185 times, High Networth individuals (HNI) 512 times, Retail investors (RI) 35 times

IPO Price - Rs.903; Listing day price Rs.2,310.25

Devyani International Limited - Issue Size 1,838 crores

IPO was oversubscribed overall by 117 times.  Category wise over subscription - Qualified Institutional Buyer (QIB) 95 times, High Networth individuals (HNI) 213 times, Retail investors (RI) 39 times

IPO Price - Rs.90; Listing day price Rs.123.25

The common thread running in these IPO's are 

1. the HNI segment is oversubscribed many times higher than other categories especially retail investors.  
2. listing of shares on first day was with a huge premium and HNI investors had a huge opportunity to offload shares at a huge profit

What makes the above 2 common threads interesting?

IPO financing by NBFC's is a very lucrative business for them.  NBFC lend to HNI short term loans with interest rate ranging between 6% to 10% (interest rate depends on demand for a particular IPO).  Another interesting point to note here is the leverage for these loans are as high as 70 to 80 times, which means that an individual can place bids for Rs.70 to Rs.80 crores by just having Rs.1 to Rs.2 crores in their account.  This practice leads to build up of high demand for IPO's and leads to high levels of over subscription which is also one of the reason for high listing price on date of listing.  HNI's who exit on the listing date at times make huge profits without actually having any money (minimum money) in their account.  Though there is a big risk in this (if listing day price falls below issue price).  

With big ticket IPO's still lined up like Paytm, PaisaBazaar etc HNI activity is expected to be high.

This is the reason why RBI has acted now. In a notification number DOR.CRE REC.No.60/03.10.001/2021-22 dated 22.10.2021 RBI has directed as below the NBFC's (effective date 1st April 2022)

Ceiling on IPO Funding – There shall be a ceiling of ₹1 crore per borrower for financing subscription to Initial Public Offer (IPO). NBFCs can fix more conservative limits. 

This will regulate huge demand from HNI's by leveraging funds of NBFC's and also will stop artificial inflation of subscriptions.  With this action of RBI there will reduction in speculation in IPO market.

A good move by RBI.