RBI to prescribe 25% margin on IPO financing - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

RBI to prescribe 25% margin on IPO financing

Feb 26, 2000

The Reserve Bank of India is expected to fix a minimum lending margin of 25% for banks funding initial public offerings (IPO). This stance will cap financing of new issues by banks to the extent of 75% of the share application amount. Currently there is no stipulation on IPO financing and banks are fixing margins and exposures to IPOs based on their own internal norms. The RBI is expected to set up a panel to frame prudential guidelines on IPO financing to cover all banks. These guidelines are expected to be announced in the April credit policy.

This moves stems from the recent review of RBI on IPO financing of banks. Many banks are apparently extending IPO loans at margins much below the industry standards. Some banks are currently funding IPOs at margins as low as 10%, while margin against physical and demat shares is around 25%-30%.

Banks have become active in financing IPOs recently and this has resulted in new issues getting oversubscribed by many times. Also this avenue has become a comfortable route for banks to deploy their funds at higher rates of interest. The reason for charging margins below the industry standard can be attributed to stiff competition among banks for IPO financing.

This entire process of applying by leveraging is based on the premise that on listing the issue would open at a higher price (high enough to cover the cost of financing) than the issue price. However if this does not happen and it gets listed below the issue price, then investors have to bear the burden of this loss coupled with the cost of financing of the issue.

Hence RBI is framing these norms as it appears to be concerned on the following issues:

  • As IPO market continues to boom, it will attract low quality companies to raise money.
  • Investors who have taken loan to apply these issues may not be able to repay there loans if the issue were to fail on listing. As the paper of the issue itself is held as collateral banks would also find it difficult to liquidate and recover the loan.

In order to avoid such an eventuality RBI is taking these preventive measures. It would not like to see the health of the banking system weaken again by bad loans as happened in 1992 stock market scam and the 1994 IPO market crash.

Equitymaster requests your view! Post a comment on "RBI to prescribe 25% margin on IPO financing". Click here!

  

More Views on News

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

ICICI Bank's Quarterly Results Sends Stock to 52-Week High (Views On News)

Jul 26, 2021

ICICI Bank expects to maintain margins at the same level in coming quarter.

HDFC Bank Earnings Miss Estimates Due to Sharp Rise in Gross NPAs. Stock Falls 4% (Views On News)

Jul 19, 2021

Covid-19 disrupted HDFC Bank's earnings which showed profit growth at multi-quarter lows.

More Views on News

Most Popular

Sansera Engineering IPO: Key Points to Consider (Views On News)

Sep 8, 2021

This IPO is a pure OFS and the company is looking to raise Rs 12.8 bn at the upper price band of Rs 744.

5 Stocks that Turned Rs 1 Lakh into Rs 1 Crore (Views On News)

Sep 7, 2021

Patience is one of the biggest virtues you need to have if you want to become a crorepati in the stock market.

The Top Stocks to Sell in this Bull Market (Profit Hunter)

Sep 8, 2021

When I saw the list of so-called 'value stocks' published by a leading brokerage, my worst fears came true.

5 Indian Companies that are Leading the AI Race (Views On News)

Sep 9, 2021

During the pandemic, India reported the highest increase in the use of AI at 45% compared to other major economies. AI has potential to add US$90 bn to the Indian economy by 2025.

How to Create a Second Income from Trading (Profit Hunter)

Sep 10, 2021

My trading system that works in all kinds of markets.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2021
Get our special report Multibagger Stocks Guide (2021 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Sep 17, 2021 (Close)

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS