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The IPO market is ablaze, with new companies hitting the public market almost daily, sparking massive investor interest and staggering share price pops upon listing. But as investors chase even greater returns, they’re turning to leverage, borrowing money to invest in these hot IPOs. Enter IPO financing, a niche service offered by wealth managers and Non-Banking Financial Companies (NBFCs) to fuel these high-stakes investments.
This financing strategy has become a game-changer, especially evident in oversubscribed IPOs where high net worth individuals (HNIs) vie for coveted shares with the help of these loans. For instance, in July 2021, IPOs sought to raise ₹18,400 crores, but bids totaled a staggering ₹8.86 lakh crores, with a significant portion fueled by IPO-linked loans.
However, recent regulatory actions, particularly against prominent player JM Financial, have cast a shadow over this booming sector. The Reserve Bank of India (RBI) raised concerns over JM Financial’s lending practices, citing excessive leverage and control over customers’ bank accounts through power of attorney agreements. The RBI’s scrutiny also pointed towards potential governance issues, prompting strict directives to halt IPO financing activities.
While the exact infractions remain unclear, speculations abound, including flouting RBI rules on loan limits and inflating IPO subscription numbers. Despite JM Financial’s denial of wrongdoing, the regulatory crackdown has left the NBFC sector reeling, with potential repercussions for others involved in IPO financing.