Investors can apply for initial public offerings (IPOs) by borrowing money from brokers or financial institutions via IPO margin funding. Using this facility, investors can purchase more shares than they could with their own money alone. Although this approach has the potential to increase allocation, it also raises concerns about leverage and interest expenses. Read on to learn about the IPO margin funding and beyond.

Introduction to IPO Margin Funding

IPO margin funding is a short-term loan given to an investor who wishes to apply for a significant number of IPO shares by a broker or non-bank financial institution (NBFC). 

The investor pays a margin (typically between 10 and 30 percent, but occasionally less), and the lender covers the remaining amount rather than the entire application amount. 

Because of this, the investor can apply for much larger IPO amounts than they could with just their own liquid capital.

Why Do HNIs Use Margin Funding for IPOs?

HNIs (High Net Worth Individuals) often invest in the Non-Institutional Investor (NII) category, which has significantly bigger minimum application sizes than the retail category. This can cost enormous sums of money, frequently in the crores of rupees. By lowering the initial cost, margin finance provides a clever option.

This is why HNIs like to use it.

Greater Potential for Allotment

They can apply for more shares.

Effective Financial Management

As fewer funds are blocked, there is more liquidity for other investments.

Brief Loan Terms

The funding typically lasts just six to ten trading days, which is exactly in line with the IPO procedure.

Possibility of Increasing Returns

Leverage can increase profits if the IPO lists at a premium.

How IPO Applications Use Margin Funding

Apply for Funding

The investor contacts an NBFC or broker that provides IPO margin funding. They must fulfill eligibility requirements (creditworthiness, net worth, etc.) and have a Demat account and trading account.

Pay Margin in Advance

The lender covers the remaining amount, with the investor paying the margin (let's say 20–30% of the application value). The money is withheld until the allotment. 

Submit IPO Application

The investor uses ASBA or a comparable method to apply for the IPO under their name with the total amount.

Listing & Allotment

The registrar completes the allotment upon the conclusion of the IPO. The Demat account is credited with any shares that are allotted. Usually, the allotted shares are used as collateral for loans.

Repayment

The investor pays back the loan balance with interest. They can pay off the loan by selling listed shares. The investor continues to pay interest on the loan for the duration, even if no shares are distributed.

Benefits and Risks for HNIs

Benefits

Leverage

You can apply for considerably larger sums than your liquid capital would permit.

Short-term Commitment

Only during the IPO phase are funds blocked.

Possibility of Large Returns

Gains on a greater allocation may be substantial if the IPO lists well.

Risks

Interest Cost

Even if you don't receive any shares or if the shares list poorly, you still have to pay interest.

Market Risk

Because you borrowed a portion of the price, losses could increase if the share price falls below the issue price or declines quickly after.

Allotment Is Not Guaranteed

In extremely overcrowded IPOs, even huge applications may result in a very small allocation. 

Forced Repayment or Holding

You may have to pay cash, or your lender may sell to recover the money if shares are not sold or funds are not available.

How to Apply for IPO Margin Funding

You must learn about how to apply as HNI in IPO. Create a Demat and trading account with a broker that offers IPO margin funding to apply. Deposit the margin and finish the KYC before the IPO ends. Apply using the broker's portal or ASBA. After allotment, monitor the loan's progress and make timely interest payments.

The Bottom Line

HNIs can participate in large IPOs with IPO margin funding without using all their funds. They can seek higher profits and invest more, but there are risks and costs involved. Before applying, always review the market trend and interest rate. Make sure you can pay back on schedule. It can increase your income if used wisely, but it can also result in losses if used irresponsibly. Before investing, be clear and make a plan.