IPO funding: RBI introduces new rules for NBFCs, caps IPO funding
The central bank has introduced “scale-based regulation,” aimed at mitigating any systemic risk amid looming fears of an increase in bad loans after the pandemic.
“NBFCs can set a more conservative limit,” the central bank said in a notification Friday. There will be a ceiling of 1 crore per borrower for the financing of the subscription to the initial public offering (IPO).
This means that a traditional practice of borrowing money to invest in IPOs and exiting through day one listing gains is likely to cease from the next fiscal year. This is called “leverage” in market jargon. However, upcoming IPOs like Paytm or Nykaa will carry on the tradition this year.
“The number of subscriptions (oversubscriptions) in the HNI category will decrease, which will benefit the price discovery process on the day of the listing,” said Dharmesh Mehra, CEO of DAM Capital. Currently, these leveraged subscribers are discharging on the first day itself, ”he said.
The Reserve Bank of India has established a framework for non-bank finance companies by dividing them into four distinct categories, as it aims to ensure regulatory parity with banking regulations. These include the base layer, the middle layer, the top layer and the top layer.
NBFCs marked as investment and credit companies, microfinance institutions and factoring companies will need to raise net equity – the total sum of equity and free reserves – to Rs 10 crore by the end of March 2027 from 2 to 5 crore of existing Rs.
The regulatory minimum net held fund (NOF) for NBFC-ICC, NBFCMFI and NBFC-Factors will be increased to ₹ 10 crore through a downward trajectory, the central bank said.
Category 1 NBFCs will now be required to recognize bad debts in accordance with the 90-day overdue banking standard. This will be done in three phases until the end of fiscal 2026, when these last mile lenders will be tied with banks in the sour asset classification.
“While this will harmonize the prudential standards of these NBFCs with those of banks and other large NBFCs, it remains to be seen how soon these NBFCs will also benefit from the associated tax and collection relief / benefits like banks,” he said. said Raman Aggarwal, zone president NBFCs, Council for International Economic Understanding (CIEU).
The first category mainly involves NBFCs with no deposit below the asset size of Rs 1,000 crore. These are the lenders who do not use public funds without any client interface.
The second category includes all NBFCs accepting deposits, regardless of the size of the asset. Even depository entities with a benchmark size of Rs 1,000 crore.
The third or top layer will include the top ten eligible in terms of asset size.
Depending on sudden risk factors, the RBI may move companies from the top tier to the top tier or the fourth tier by citing systemic risk.
“Existing credit concentration limits prescribed for NBFCs separately for loans and investments are to be merged into a single exposure limit of 25% for a single borrower / party and 40% for a single group of borrowers / parties RBI said.