Thread by @FinFloww

How this IPO mania in India will end? A thread 🧵

The primary markets in India (which is the market where securities are created) are real hot right now.

From giants like Paytm, Zomato, Nykaa, Policy Bazaar to smaller companies all opening their IPO and getting a great response.

All this looks really good from the outside, but if you look into the details there are a lot of problems here and this present system isn't sustainable.

The RBI had to intervene.

With the new regulations no borrower can borrow more than 1 crore rupees from the NBFCs to invest in IPOs.

People who take this leverage to invest in IPOs exit on listing gains and return the money.

So, what are the problems with this system?

Clearly investing in a companies initial offering, gaining off it's listing gains and then taking it away on a large scale isn't a very good practice if you see the bigger picture.

You must be thinking "Naah man how does it matter?" Now let's talk about the scale at which all of this is happening, then you'll be able to understand what kind of market risks we're talking about here.

Any HNI investor putting 1 crore of their own money could get leverage upto 70-100 crores for IPO from NBFCs at a 7-8% interest rate for a short period of time. Then they used to return it after selling on listing.

So, this rule will reduce a large scale selling on listing. When the rich cannot borrow more than 1 cr for the IPO, they'll most likely put their own money and that would make selling less likely.

This will clearly reduce the lending risk too which could result in bad loans and also keep the IPO financing practice healthy. What's been happening in the IPO market is mania and it's not sustainable.

A financier can also do well only when they don't take too many risky bets. IPO funding is a risky business and it could stress these NBFCs later. And it's not a sustainable thing for the overall market too. Thus this rule has come in time.

The RBI has been working on an overall reduction of financial risks post-pandemic. Anything which could result in a situation of bad-loans should be handled well.

This regulation will come in effect from the next financial year.

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