Let us begin with a quick recap. Last fortnight was eventful for the stock market. Not in terms of index movements alone, it was all ‘hip and happening’ in more ways than one. The central bank not only relaxed its cap on financing of IPOs, but also raised the ceiling on LAS (loan against securities).
For the record, the IPO financing limit has gone up to ₹25 lakh from ₹10 lakh per individual. The LAS ceiling now stands enhanced five times, up from ₹20 lakh to ₹1 crore.
The new norms, incidentally, will apply to units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as well. Both structures are deemed ideal for wealthy investors.
As the RBI authorities have pointed out, the time is just ripe for these revisions. IPO financing and LAS norms have not been amended for a long time. However, market dynamics are changing, and newer trends are firmly established. This is reflected in interesting numbers on several fronts — the sheer variety of mobilisers, the volume of applications, the average ticket size and so on.
The past three years, to be more specific, have witnessed quite a few sizeable floats. Among these were Hyundai Motors, Jio Financial Services, One97 Communications (Paytm). These are random examples, selected without bias. The trend is very likely to sustain in the days ahead. A quick review of draft offer documents filed recently with Sebi for approval will reveal the diversity and number of new issues expected in the coming quarters.
Among the names that have already hit the primary market are LG Electronics, Tata Capital, Canara HSBC Life, Canara Robeco AMC and WeWork India.
Retail investors and HNIs have eagerly participated in most of these issues. Higher loan limits and other friendly proposals will be particularly useful for these sections of investors. Market watchers believe these will help steer more credit towards capital formation.
Things to do
If you are a lay investor waiting for your turn to leverage, this is evidently the right time to begin. Here are some to-do’s for your reference, all in the form of questions.
To borrow for the sake of borrowing stems from poor logic. And an investor who pledges his holdings to place mindless bets is probably making a big mistake. So, keeping the risks in mind, here are a few things to avoid.
I have, in the course of my professional deliberations, found out that Loan-to-Value (LTV) is always a reliable metric to consider. If your LTV goes way beyond, say, 50 per cent, you may have a problem down the road. What if there is a major correction in the market? What if you are compelled to liquidate, at least partially?
In some cases, asset prices can swing wildly. These are your potential red flags. The same is applicable for assets like unlisted shares — you may not find a ready market even if you wish to make a distress sale.
Moreover, I regret to say that investors sometimes do not review their loan deals carefully. If you read the terms and conditions carefully and well in advance, you will be able to mark all important clauses. Make sure your lenders are not empowered to change critical clauses. Collateral mandates are important considerations. A sudden recalling of loans or even simple changes in interest payment terms can upend your plans.
The author is partner at Wishlist Capital (ARN-84929)