IPO funding seen hit by unsecured lending curb

Brokerages have made such borrowings mostly from mutual funds,typically at twice the commercial paper market rate,and then turned around and loaned the funds to rich clients. The wealthy investors,in turn,used the cash to invest in a recent slew of IPOs,fuelling aggressive valuations. The Reserve Bank of India is afraid of asset bubbles, said Alex Mathews,head of research at Geojit BNP Paribas Financial Services. This will definitely be a hindrance for brokerages.

Analysts say the move will increase the costs associated with IPO fundraising in India,as brokers used the financing tactic to work around regulations and avoid hefty stamp duty. Brokers would issue a one-year secured non-convertible debenture (NCD) with a put/call option exercisable before 89 days. Under Indian law,a company has 90 days in which to place security for the paper or pay a higher stamp duty. The new rule,which is expected to take effect by the end of the month,eliminates that loophole.

It was a profitable business. People have made a good amount of money, said an official at a local brokerage based in Mumbai,who declined to be identified and said his firm had made a few such deals. However,it is a cycle that forms. Now that recent IPOs have not been performing well,sentiment has gone sour. So people will anyway not come to us with big demands for funds, he added.

The central bank move comes in the wake of recent heavily subscribed IPOs of state-run firms NHPC and Oil India,which together raised $1.8 billion for the government.