Cap NBFCs' IPO finance to curb bidding with borrowed money

The RBI has proposed a four-layered structure for non-banking finance companies (NBFCs) and new norms to strengthen their governance and operations. It comes in the wake of falling of two large NBFCs - IL&FS and DHFL. Through a host of measures proposed in the paper, the regulator wants to treat NBFCs at par with banks.

Of the 9400-odd NBFCs in the country, 9,200 are having an asset below Rs 1,000 crore and thus falling under Base level. The RBI paper proposes to up their minimum-owned funds of NBFCs to Rs 20 crore from Rs 2 crore. Also, 90-day overdue loans will be termed NPAs versus 180 now.

However, the crux of the matter in the entire paper is the impact on IPO financing by HNIs through NBFCs. While there is a limit of Rs 10 lakh for banks for IPO financing, there is no such limit for NBFCs. Taking into account the unique business model of NBFCs, the draft has proposed to fix a ceiling of Rs 1 crore per individual for any NBFC. Here lies the catch.

HNIs, with money borrowed from NBFCs, are allowed to pay just 1 per cent margin money to bid for the entire portion reserved for them. In the absence of any separate rule for NBFCs, they had been facilitating their HNI customers to borrow a huge sum of the amount at a hefty interest rate, as high as 18 per cent, and invest the same in the IPO. As a result, the IPOs used to see oversubscription, running 300-400 times. Confused over it, the retail investors were left with a Hobson's choice in joining the rate race of buying those over-subscribed stocks, without knowing the portending danger of losing their hard-earned money once the share price of those stocks slid. So, the RBI move comes at nick of the hour to salvage the damage.

NBFCs, with a balance sheet size of one-fourth of banks, lend if the issue is expected to be oversubscribed-and it gets majorly oversubscribed because NBFCs lend. Since it is getting majorly over-subscribed, they lend more leading to further over-subscription and the cycle goes on. If this new proposal goes through, we will know the real demand.

Once the Bill goes through, the inflatory figures will no longer exist in the primary market and people would be able to make good of the fundamentals on their own money.