NBFCs rush to issue ultra-short-term debt papers to fund IPOs

October 29, 2021 3:30 AM

Tata Capital Financial Services has raised funds via IPO-CP. Most commercial papers have the value date on November 1 and 2. The value date is the day when debt papers are given to investors in exchange for money.

The proceeds from the fresh issue will be utilised towards working capital requirements, repayment of debt and general corporate purposes.The proceeds from the fresh issue will be utilised towards working capital requirements, repayment of debt and general corporate purposes.

By Manish M Suvarna

Non-banking finance companies (NBFC) have aggressively been raising money since the start of this week by issuing ultra-short-term commercial papers to fund the rush of initial public offerings (IPO). NBFCs raised more than Rs 40,000 crore in the last four days, with Bajaj Finance and Aditya Birla Finance emerging as large borrowers. Dealers with brokerage firms expect NBFCs to raise more funds by the end of this week.

“Whenever there is demand for IPOs, CPs are issued, as that is an easy way to raise funds. When the new guidelines issued by the RBI will come into play, things will change accordingly,” said Mahendra Kumar Jajoo, chief investment officer – fixed income at Mirae Asset Investment Managers (India).

Tata Capital Financial Services has raised funds via IPO-CP. Most commercial papers have the value date on November 1 and 2. The value date is the day when debt papers are given to investors in exchange for money.

“With several IPOs being expected in November, NBFCs are rushing to raise money due to positive sentiments in equities. Levels will remain in the NBFC segment due to sector limit constraints,” said Vikas Garg, head – fixed income, Invesco Mutual Fund.

To fund their clients who want to invest in these IPOs, NBFCs raised funds through IPO-CP, which are called ultra-short-term debt instruments, having a maturity of up to 8-12 days. Earlier, these papers were issued at 80-120 basis points higher than the rates on papers issued by NBFCs maturing in three months. But, the spread between three-month papers and IPO-CP has increased sharply now to 200 basis points due to caution among investors.

“System liquidity is getting reduced as the RBI is conducting both scheduled and ad-hoc VRRRs. The cut-off has been higher and there is an apprehension that liquidity is going to be tighter going ahead, leading to investors demanding higher spreads,” said Anand Nevatia, fund manager with Trust Mutual Fund.

The central bank has put a cap on lending by NBFCs to their single investors at Rs 1 crore to buy stocks in IPO from April 1. This rule will reduce funds in the hands of high networth individuals for bidding in IPOs. “Also, with new RBI regulations coming next fiscal year, NBFCs are aggressive tapping the profitable IPO funding business,” Garg said.

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