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Margin Funding in IPO

ICICI Securities 17 May 2021 0 COMMENT

Several successful initial public offerings (IPOs) and debuts on the exchanges has triggered increased investor interest in this area. More and more investors are now looking to try their hand at putting their money in upcoming IPOs. The prospect of generating quick, easy and high returns has caught the attention of many investors, especially high-net-worth individuals (HNIs).

Many now wish to invest a higher amount in such share issues. This is where the concept of margin funding in an IPO (also called IPO financing) comes into the picture. Margin funding in IPOs is an option available to investors, usually HNIs, willing to leverage their existing funds to get higher amounts and invest the same in an initial public offering.  

Here's what Margin Funding is all about

Want to use your funds to get more to invest in an upcoming IPO? Then you can go the margin funding or IPO financing way. This is essentially a short-term loan provided by certain lenders and brokers, which allows you to invest a higher amount in an IPO. The IPO financing option is a product that usually targets HNIs, but can be availed of by other investors as well. In India, only the non-banking finance arms of some banks and non-banking finance companies (NBFCs) are allowed to offer margin funding.

Key points about how Margin Funding works

Lenders typically ask a customer (investor) to pay around 40%-50% of the loan amount upfront as margin. The lender then provides the remainder. The funds are provided for a short duration, usually around a week (6-8 trading days), from the day the IPO subscription closes until the listing day.  

An investor is also required to pay an interest of anywhere between 8%-15% (varied from lender to lender) on the loan amount. A point to be noted here: even if you are allotted lesser shares than what you had applied for, you must pay interest on the entire loan amount sought.

IPO financing facility comes with additional costs, over and above the interest payable. You have to bear the cost of dematerialisation, processing fees, and dematerialisation charges again when the shares are sold after listing. Hence, one must carefully assess the scope of returns in the IPO investment and the risk involved.

Steps involved in IPO financing

Here is a look at the different steps involved in margin funding or IPO financing.

  • First, you need to open a funding account with the NBFC (lender).
  • You need a new demat account or provide the power of attorney of an existing one.
  • Then, fill out the forms for margin funding, as required by the lender. Complete the documentation part of the process.
  • Inform the lender of the IPO you wish to invest in, details of the share issue, price, number of shares, etc.
  • The next step involves providing the loan margin or upfront payment amount.
  • Within 24 hours of completion of these steps, the funds are released by the lender.
  • The lender then applies for the required number of shares on your behalf.
  • The amount payable is clocked for the time that the allotment process takes place.
  • Once allotted, the shares reflect in your demat account, while the money is deducted for the same.
  • The lender is then directed to sell the shares once listed.
  • Finally, the profit and loss account is settled by the lender on the sale of shares. 

Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. Please note, I-Sec is acting as a distributor to offer IPO distribution related services and distribution of IPOs are not Exchange traded products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.