SME IPO for NBFCs

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SME IPO for NBFCs
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SME IPO for NBFCs
IPO Funding is a short-term loan that banks and
other financial institutions provide to the
investors to fund their Initial Public Offer
(IPO) application. Investors who would like to
apply for equity shares in an IPO, but do not
have required money can borrow the remaining
amount from the financial institutions as a loan.
In general, the banks and Non-Banking Financial
Corporations (NBFCs) fund a part of IPO
application while remaining fund is provided by
the applicant. Small Medium Enterprises (SME)
looking to raise funds easily have now a great
opportunity to raise funds through investors in
Stock Exchange. Remarkably, 80 companies raised
an astounding Rs.811 crore through IPOs in
2016-17. This is 267 more than the preceding
fiscal where 46 companies used the IPO route and
garnered Rs.304 crore in 2015-16.
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Funding

• The 3 key reasons why funds are being raised
• Business Expansion Plans
• Working Capital Requirements
• Other General Corporate Purposes
• Funding Benefits through SME IPO
• Ready access to Capital and Financial
  Opportunities
• Premium Valuation of the company
• Entry Exit Platforms for PE / Other Investors
• Efficient Risk Distribution for Investors
• Utility as MA Currency
• Tax Benefits of SME IPO
• Company Profile Building
• Incentive Mechanism for Employee
• Benchmarking Fair Value of SME businesses

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NBFCs and SME IPO
With the market for initial public offerings is
on a boil, NBFCs which fund rich investors to
apply for shares, experienced 2017 as a fantastic
year for them. In the present scenario, NBFCs
laugh their way to the bank while the rich
investors move forward to cash in on IPO
mania. Irrespective of whether or not the
wealthy investors make money, NBFCs have been
creating wealth hand over fist in what now
appears to have become a zero-risk game for them.
With a great majority of the issues listing at a
juicy premium to the issue price, the big
investors have been enhancing the size of the
bets. And NBFCs seem only too willing to finance
them!That appears to have formed a virtuous
cycle of sort, where big demand for the issue
from high net worth investors (HNIs) sparks more
demand from retail participants they do not want
to be left out. Some market analysts say this is
giving a distorted view of the actual demand for
the issue. At the same time, IPOs in which the
HNI portion has been heavily subscribed have
listed at a fat premium to the issue prime.
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NBFCs and SME IPO
To the joy of HNIs, the shares have been listing
at premia good enough to cover interest costs
even where the subscription has been huge. For
example, IPOs of Avenue Supermart , CDSL , BSE
Ltd and AU Small Finance Bank have all made money
for HNIs. This trend is encouraging both HNIs and
the NBFCs that finance them, to take even higher
bets. In any IPO funding, NBFCs are not going to
lose anything as they collect the interest amount
upfront from the HNIs. Even if the shares happen
to open below the issue price, the NBFC will
still not lose anything as they have the 1
percent margin money which the HNIs have put up
with them. The NBFC will deduct the loss from the
margin money and refund the rest to the HNIs.
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What people at MUDS believe
Theoretically, huge oversubscription tends to
reduce the return for HNIs, and further, there is
a risk of losing money, because the listing
premium has to surpass the interest cost. -Divya
Gupta (Market Analyst, MUDS Management Pvt
Ltd) Stock Exchanges in India have introduced
separate platforms to support SMEs. There are
different platforms opened by stock exchanges in
India to help SMEs raise funds in the stock
market. -Divya Gupta (Market Analyst, MUDS
Management Pvt Ltd)
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Presently, it appears that nothing can stop the
NBFCs. However, it is not as if there is no risk
at all .If a large number of applicants withdraw
after the issue has closed, the allotment for the
other applicants in the fray will be greater. In
case they refuse to cough up more margins, and
the shares open below the issue price, the NBFC
would be in trouble. -Shweta Gupta, Founder, and
CEO, MUDS
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Thank You!