IPO financing is a loan service offered by a variety of financial institutions including Non-Banking Financial Companies (NBFCs) for applying in primary market issues. (Shares in IPOs and FPOs). With the availability of IPO financing, investors who are lacking funds or cannot raise the amount for some other reason, can borrow the same from these institutions. All they are required to pay is the margin amount, and the rest is paid by the lender. Though the lenders provide the majority of the amount; there are several payments including additional charges which are to be borne by the customers.
These include interest charges, other charges such as one-time processing fee, stamp duty charges and margin amount.
The rate of interest: One of the pivotal factors when opting for IPO financing or funding. It single-handedly determines whether taking a loan for investment in the primary issues is worth it or not. The rate of interest offered generally varies between 8 to 16%. Also, the NBFCs charge a higher rate of interest as compared to the banks. You must emphasise on selecting the lender with a beneficial rate of interest, because the higher the rate of interest, the higher the liability. While taking the loan amount, tenor must be emphasised on. Generally, the repayment tenor is not more than 3-6 months, and the failure to do so can land the borrower in trouble. Thus, you have to be ahead in the numbers game.
Margin Amount: Similar to other loans, IPO financing, requires you to pay a processing fee upfront. Firstly, you must know that this service is provided for the HNI category only. And in some cases for a retail client. In both the cases, the margin amount has to be paid up front. If you do not have the required cash to complete the payments, securities can be provided on behalf of cash.
One-time fee: Similar to other loans, one-time processing fee has to be paid by the borrower which generally falls in the price range of INR 1000 to 1500, depending upon the nature of the loan and may vary from case to case.
Other charges: As mentioned above, additional charges such as stamp duty charges and other document related charges need to be borne by the customers.
Apart from the points mentioned above, there is a maximum and minimum loan amount which varies from lender to lender. While few lenders provide a minimum loan of INR 1 lakh, there are few institutions who provide minimal loan value of INR 25 crore. Thus, we can understand the magnitude of diversity available in IPO financing.