Funding cap, weak markets sour rich investor sentiment on IPOs

Rich investors – among the biggest bidders in recent initial public offerings – are eschewing such share sales these days as uncertain markets and regulatory changes have soured sentiments. Their lack of appetite for these prospective stock market debutants has resulted in recent IPOs just about scraping through in several cases.

High net worth individuals’ combined bidding amount in nine IPOs that were launched since April 1, including

, was ₹15,900 crore. In comparison, the HNI category in ‘s IPO got bids worth ₹91,000 crore against shares worth ₹803 crore set aside for them. In ₹1,040 crore IPO of CE Info Systems, they applied for shares worth ₹70,000 crore compared to shares worth ₹166 crore on offer for the HNI category.

Out of the nine issues since April, the HNI portion was not fully subscribed in three issues such as Paradeep Phosphates, Delhivery, and Prudent Corporate Advisory.

The HNI portion in the other three issues, such as Ethos, Life Insurance Corporation, and Rainbow Children’s Medicare, was subscribed 1-3 times.

“We have observed that HNI customers, who earlier used to invest a large quantum, are not even bringing in their own money to invest in IPOs. The grey market price for IPOs in this financial year is also not encouraging where HNI can invest,” said Suvajit Ray, head of products,

. “We have seen many HNI customers call off financing because of the increased margin requirements and low subscription volumes.”

In 2021, HNIs put bids worth ₹100 crore to ₹500 crore in IPOs. They paid finance companies 5-10% for the loan, which was returned soon after the listing. With the Reserve Bank of India capping the IPO financing at ₹1 crore per client from April 1, the window to borrow large amounts and bet on IPOs has dried up.

Meanwhile, market regulator Sebi reclassified the HNIs into two categories from April 1. The first is those who put bids between ₹2 lakh and ₹10 lakh in an IPO. The second is those who invest more than ₹10 lakh. This coupled with changes to the allotment process for HNIs has dampened demand.

“A person who subscribes for ₹100 crore or bid shares worth ₹10 lakh will be equally allotted shares in the new system,” said Dharmesh Mehta, CEO, DAM Capital Advisors. “The non-proportionate allocation in the HNI category and non-availability of bifurcation of data on HNIs subscription has demotivated them from participating in the IPOs.”

Market participants tracking the IPOs said the unofficial grey market prices for such issues are dependent on demand, especially from HNIs. In the absence of HNIs’ aggressive bidding, grey market prices have remained subdued, which has, in turn, affected overall subscriptions to IPOs.

The IPO funding cost is derived from the extent to which HNIs place bids.

“After the RBI rule on limiting IPO funding, the response of HNIs to such funding has reduced significantly,” said Nitin Shanbhag, head of investment products,

Private Wealth. “While the predominant factor is the restriction on IPO funding, the other aspect is the prevailing heightened market volatility on account of geopolitical crisis, rising global inflation and hike in interest rates by central banks.”

Market participants said in the next bull market for IPOs, smaller individual investors with risk appetite might be the next big borrowers for investing in such issues.

“These affluent mass customers will now invest up to ₹1 crore and take ₹1 crore financing with 50% margin to apply in the IPOs, where they see more value propositions,” said Ray of IIFL Securities.