NON-BANKING ENTITIES

IN THE SECURITIES
MARKET

DR. LATA RANI

 INTRODUCTION
Non-Banking Financial Company (NBFC) is a company registered under
the Companies Act, 2013 engaged in the business of loans and
advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable securities
of a like nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is
that of agriculture activity, industrial activity, purchase or sale of any
goods (other than securities) or providing any services and
sale/purchase/construction of immovable property. A non-banking
institution which is a company and has principal business of receiving
deposits under any scheme or arrangement in one lump sum or in
installments by way of contributions or in any other manner, is also a
non-banking financial company (Residuary non-banking company).
PROCEDURE FOR APPLICATION TO
THE RESERVE BANK FOR
REGISTRATION
The applicant company is required to apply online and submit a physical copy of
the application along with the necessary documents to the Regional Office of the
Reserve Bank of India. The application can be submitted online by accessing
RBI’s secured website https://cosmos.rbi.org.in . At this stage, the applicant
company will not need to log on to the COSMOS application and hence user ids
are not required. The company can click on “CLICK” for Company Registration
on the login page of the COSMOS Application. A window showing the Excel
application form available for download would be displayed. The company can
then download suitable application form (i.e. NBFC or SC/RC) from the above
website, key in the data and upload the application form. The company may note
to indicate the correct name of the Regional Office in the field “C-8” of the
“Annex-I dentification Particulars” in the Excel application form. The company
would then get a Company Application Reference Number for the CoR
application filed on-line. Thereafter, the company has to submit the hard copy of
the application form (indicating the online Company Application Reference
Number, along with the supporting documents, to the concerned Regional
 LOAN AGAINST SHARES

• Whether it is to meet financial emergencies or fulfil certain short-term or

long-term goals, availing of a loan has become easier and acceptable
than ever before. However, with such high demand for loans, they are
accompanied with high-interest rates that make them unapproachable
and unaffordable for numerous people. Moreover, they often require the
placement of cherished possessions or real estate as collateral, making
them a risky option.
• If you are looking to avail of a loan but do not want to trap your physical
possessions, an effective alternative can allow you to get a loan and
make the most of your share market investments - a loan against demat
account shares.
 LOAN AGAINST SHARES

A loan against your demat shares is a process through which you can
avail of a loan by pledging your shares as collateral. A loan against
demat shares helps you monetise your investments without selling them
off to realise the capital amount. A loan against demat shares requires
no collateral or additional securities apart from the shares already in
your demat account.
 ELIGIBILITY CRITERIA FOR
AVAILING OF A LOAN AGAINST
DEMAT SHARES
To avail of a loan against the shares in your demat account, you must first
ensure that you are eligible for the loan process. Here is the eligibility criteria:
• You must be in the age range of 18 to 65 years.
• Only the shares in the name of individuals can be pledged. You cannot
pledge shares in the name of minors, HUFs, NRIs and corporations.
• You will also be required to submit certain essential documents. These
include identity proof, proof of address, proof of income and a statement
from your DP.
• You cannot pledge the shares of a company you are a Director or a Promoter.
 FEATURES OF LOAN
AGAINST SHARES
• The loan you avail against the shares in your Demat account comes
with various features that differentiate it from other forms of loans.
Here are some of the most important features you should know about:
• Your Demat shares can be pledged to avail of a loan amounting to Rs.
20 lakhs.
• Loan against Demat shares is often cheaper than personal loans and
offer interest rates in the range of 12-18% p.a.
• Loans against Demat shares do not require guarantors. Moreover,
they typically do not have any prepayment charges.
• The value of the pledged shares is assessed every week.
 WHAT TO AVAOID WHILE
AVAILING A LOAN AGAINST
• While availing of loans SHARES?
against the shares in your Demat account is
a convenient option, it is important to utilise these funds
responsibly and cautiously.
• Some investors avail of loans against their Demat shares only to
reinvest the money back into the market. However, if the market
goes into a bearish trend, this move can result in considerable
losses as you will have to still pay the interest to the financial
institution. Therefore, it is recommended to avoid this strategy.
Instead, it is best to utilise the loan amount for financial
emergencies or to meet financial goals soon. These can include
covering expenses for household, wedding, education and capital
for business investments.
 IPO LOANS
IPO Financing / IPO Funding / IPO Loans, as the name
suggests, is providing finance for the purpose of subscribing
to initial public offers done by companies. In case of IPO
Financing, the exposure is based on the borrower, and the
securities/ shares, if allotted, are taken as collateral for
securing the obligations under the loan. The investor will
realize the shares so allotted in the IPO and pay-off the loan
taken from the Banks/NBFCs.
 IPO LOANS
• IPO Funding (or IPO Financing) is a loan offered for applying in
primary stock market by NBFC's to high net worth individuals (HNI).
The investor pays only small margin for applying in IPO and rest
amount is funded by the lender. As per Investment Information and
Credit Rating Agency (ICRA), over Rs.20,000 Cr IPO funding is offered
in a good mainline IPO.
• Through IPO Funding, an investor can leverage its own funds in
primary market and thereby maximize the profits in a very short span
of time. IPO Funding Loans are mostly available to HNI clients. It helps
HNI's who would like to maximize their chances of allotment in an IPO.
IS IPO FINANCING THE SAME
AS LENDING AGAINST SHARES
(LAS)
A loan against securities (LAS) is a loan given against the collateral of
shares or securities. LAS enables one to borrow funds against securities
such as shares, mutual funds, insurance and bonds to meet current financial
needs. LAS is a broader term that covers IPO Financing. However, unlike
LAS, in IPO Financing, the exposure is based on the borrower and the
securities/ shares, if allotted, are taken as collateral for securing the
obligations under the loan. One should look for the substance of the
transaction and intent of the parties rather than only the nomenclature to
determine if the facility is LAS or IPO finance. There have been norms on
LAs for banks as well as both kinds of NBFCs vide Master Circular –
Exposure Norms and Master Direction – Non-Banking Financial Company –
Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016 respectively, as amended by RBI
from time to time. However, while Exposure Norms for banks have been
clear on IPO financing limits; there has been no similar stipulations under
 NATURE OF IPO FUNDING

The IPO funding is always secured on the shares to which the

investor has applied for in the IPO. The lender will have a lien on
the shares so allotted to the investor and the investor needs to
liquidate the shares on listing and from the sales proceeds, the loan
taken have to be repaid. In case, the amount realised from shares is
not sufficient to repay the loan, the borrower will have to bring in
money to meet the shortfall in the total loan amount and the money
realised from the sale. In such a situation, it will be the personal
liability of the investor/borrower to repay the loan amount in full as
per the financing agreement with the financial institution.
 REVISED REGULATORY
FRAMEWORK
SBR (Scale Based Regulation) stipulates a ceiling limit of INR 1 crore
per borrower in case of IPO financing by NBFCs. That is, Lender should
be an NBFC The funds should be lent for IPO financing (see above, for
what exactly is IPO financing and how it is different from LAS) The
ceiling limit is Rs. 1 crore The limit is applicable per borrower As also
indicated in the Discussion paper on SBR, the proposal to fix a ceiling
limit for NBFCs was to prevent abuse of the facility in the capital
market. Leveraged IPO bids also result in turning the allotment process
in favour of short-term players in the market, edging out the genuine
long-term investors and affecting the fair price discovery.
 IPO FUNDING PROVIDERS
• Many Non-banking finance company (NBFC) in India are
involve in security based lending business. In most cases
these NBFC's are part of a large stock brokerage firm.
Most of these companies are rated A1+ (highest short-
term credit rating) from CRISIL.
• NBFC's borrow money from banks and Mutual Funds for
these loans. Banks in India cannot directly offer these
short term loans due to regulatory restrictions.
 IPO FUNDING PROVIDERS
Some of these NBFC companies who are involve heavily in IPO funding includes:
• Edelweiss through ECL Finance Limited
• Sharekhan through Sharekhan Financial Services Private Limited
• JM Financial through JM Financial Products Limited
• Aditya Birla Money through Aditya Birla Finance Ltd
• SMC Finance through Moneywise Financial Services Pvt Ltd
• Axis Bank through Axis Finance Limited
These NBFC's are well linked with their group companies for related services
broking, banking and Investor advisory. These NBFC's only offer loans for applicant
under HNI category.
 TENURE OF IPO FUNDING
IPO Funding loans are short term loans. In most cases they
are for 7 days, from the IPO closing day to date of listing of
IPO shares. Repayment tenor of these short term loans is up
to 3 months. Most lenders offers flexibility to hold or sell the
shares depending on market trends and nature of the
securities purchased.
 INTEREST CHARGED ON IPO
LOANS
Interest is charged between 8 to 12% and varies by the
lender. In addition the lender also earn interest from the
money remain locked in the bank account until allotment is
done.
 OTHER CHARGES FOR IPO
FINANCING
Customer pays a onetime loan process charges which is
usually around Rs 1000. Also the stamp duty for Loan
Agreement and other document is payable by the borrower.
 LOAN MARGIN (MARGIN
MONEY)
Customer pays a margin amount upfront to avail the loan.
The loan margin is calculated on case to case basis. The
margin account can be the cash deposited in the account or
securities provided.
 AMOUNT AVAILABLE FOR
FUNDING
The loan amount varies by the lender and the IPO. In most
cases NBFC's fund HNI's with crores of rupees for IPO's.
 MINIMUM / MAXIMUM LOAN
AMOUNT OFFERED
It varies by the lender. i.e. Sharekhan offers loans from Rs 1
lakhs to Rs 18 Crore. Aditya Birla Finance offers minimum
loan amount of Rs 1 Cr. Axis Finance offers minimum
funding of Rs 25 Cr.
TERMS & CONDITIONS TO GET
THE LOAN
The IPO Funding loans are available on certain terms and conditions. Here are
some of them:
• Individuals should be major/ HUF/ Corporate / LLPs.
• The applicant should have valid PAN card.
• The applicant has to open a bank account with a lender's preferred bank on
which the borrower creates Power of Attorney (PoA) in the favor of the lender.
Borrower cannot operate this Bank Account, since he has given the
operational right to the lender through PoA. This account is opened
specifically for funding purpose only. Borrower doesn't get cheque book, ATM
Card and other facilities including withdraw the amount as provided in other
normal Bank Account.
TERMS & CONDITIONS TO GET
THE LOAN
• The borrower has to open a new demat account for
funding purpose and provide the PoA to the lender.
Similar to funding bank account, the borrower cannot
operate this account.
• Borrower has to pay the margin money and interest
upfront to avail the loan.
• Guarantor is not required for IPO Funding.
 DOCUMENTS REQUIRED FOR
IPO FUNDING
Borrower has to go through one time documentation processing for all
upcoming issues. Required documents for IPO Financing includes:
• Proof of Identity
• Proof of Address
• Last 3 years of Financials
• MOA & AOA, List of Directors
• Shareholding Pattern
• List of Signatories
• Partnership Deed
• Net Worth Certificate
 END-TO-END PROCESS OF IPO
FUNDING
In most cases, the lender takes care of end to end process of IPO
application for its customers who are availing IPO funding. A dedicated
relationship manager is made available which helps the customer with the
process. Here are few standard steps:
• Open Funding Accounts with Lender (One time)
• Open a Demat Account with Lender or provide PoA to an existing account
(One time)
• Fill forms for IPO funding and provide all required documents (One time)
• Let lender know about the IPO to invest in, quantity and date.
• Pay the margin or create the security
 END-TO-END PROCESS OF IPO
FUNDING
• Funds disbursed within 24 working hours of the request
• The leader apply for IPO share on your behalf.
• Money get blocked while allotment is in progress.
• Allotted shares are credited in to the demat account and
money is withdrawn for the allocated shares.
• Customer instruct lender to sell the allocated shares.
• Settle the profit/losses with the lender.
 REPAYMENT OF IPO FUNDING
LOANS
• The loan amount and margin paid upfront by the customer remain locked
in the bank account. Proceeds from sales of securities to be routed
through this PoA Bank Account.
• Customer has to submit a request to the lender to withdraw the profits
earned from the transaction. On receiving the request, lender transfer the
requested amount in the investors other Bank Account mapped with them.
• In case of the losses, the lender recovers the money from the margin paid.
If the amount is more, borrower has to deposit the amount.
• In most cases transactions are settled within 7 days from the date of
allotment. But based on the agreement, the settlement can be done up to
90 days.
WHAT HAPPEN TO IPO FUNDING LOAN
IF IPO SHARE LIST BELOW PRICE?
IPO Funding offers HNI investors to borrow money for IPO investment. The borrower
& leader both carefully access the risks before funding. They go through historic
data, market trends, grey market premiums, subscription, margin amount, customer
history and many more factors before offering the loan. Despite this many a time's
things go wrong.
Some common risks in IPO Investment through funding includes:
• There is huge difference in the IPO subscription (over or under subscribe)
• The IPO shares listed at discount
• IPO processes get delayed for some reason
In most cases lender recovers the losses from the margin provided by the borrower.
In case it doesn't happen, the borrower has to pay for the remaining amount or keep
paying interest based in the terms in agreement.
WHAT HAPPEN TO IPO FUNDING LOAN
WHEN SHARES ARE NOT ALLOTED?
• In HNI category of investors in an IPO, shares are
allocated in proportionate basis in case of over-
subscription. Unless the application is rejected by the
registrar of the IPO, the HNI investor always get
something.
• In case not enough shares are allocated to cover the cost
of borrowing, the leader takes part of the margin money
and investor book the losses.
SHOULD AN INVESTOR GO FOR
IPO FUNDING?
• The demand of IPO Funding has increased over the last few years.
Increase in HNI investors, lower borrowing cost (low interest and
shorter time for IPO), good IPO's, positive market moments and
listing gains of IPO shares made the IPO financing attractive among
HNI's.
• HNI investor with a good understanding of equity market and risks
related to it could make good profits with IPO funding.
• IPO funding has high risk profile similar to investment in securities.
Funding should be considered after carefully analyzing the IPO, issue
price, market & industry trends and cost of borrowing.
ADVANTAGES OF IPO FUNDING
Following are some of the pros of IPO Financing:
• Investor can apply for more shares, thus increasing your chances of a large
allotment
• Offers good opportunity to make huge profits in 6 to 10 days.
• Only small amount of margin is needed which increases the profits
multifold.
• Cash or securities can be used as margin.
• Investor works closely with relationship manager throughout the process.
The end-to-end process is handled by the lender. This include activities like
filling IPO application, banking transactions, selling the securities etc.
ADVANTAGES OF IPO FUNDING
• Funding cost came down significantly in recent time
because of quick IPO listings and reduced interest rates.
• Simple Documentation and streamlined speedy processing
of loans.
 DISADVANTAGES OF IPO
FUNDING
Following are some of the cons of IPO Financing:
• It's a high risk high reward investment. It could result in to massive losses if
things goes wrong.
• It's a highly leveraged bet to make quick bucks. Investor pays only small amount
of margin money. The losses could be multi fold.
• This product is not for investors applying in retail category.
• Borrowing limit varies as per the scheme launched for the IPO, and on the level
of subscription under the HNI category.
• Interest rate varies as per the scheme launched for the IPO, and is charged
upfront.
• The margin amount varies by the IPO, and on the level of subscription under the
HNI category.
THANK YOU