RBI tightens rules for NBFCs funding IPOs

The Reserve Bank of India on Friday announced a limit on non-bank lenders financing subscriptions to initial share sales to stem the flow of large amounts of borrowed capital by high net worth individuals to such offerings.

“There shall be a ceiling of ₹1 crore per borrower for financing subscription to initial public offer (IPO). NBFCs can fix more conservative limits," RBI said in its revised regulatory framework for non-banking financial companies (NBFCs). The new rule will be effective 1 April.

The move to impose a limit on IPO funding follows surplus liquidity in the system being used to fund large subscriptions from high net worth individuals in recent public offerings. While the extent of IPO financing by NBFCs could not be ascertained immediately, the central bank had pointed to increased commercial paper issuances in its October policy.

“Riding on the surplus liquidity conditions, commercial paper issuances increased substantially to ₹10.1 trillion during H1:2021-22 from ₹7.9 trillion during the corresponding period of 2020-21," RBI said. The share of NBFCs in total CP issuances increased to 43.2% in the fiscal first half from 21.9% a year earlier.

Separately, the central bank also announced its new scale-based regulation for NBFCs to prevent any potential collapse, like that of Infrastructure Leasing and Financial Services (IL&FS).

The final guidelines follow a discussion paper introduced by the regulator in January.

RBI has now classified NBFCs into four categories, depending on their systemic importance and potential risk to the financial system’s stability.

All such lenders with assets of up to ₹1,000 crore will fall under the NBFC-base layer category. This includes NBFC-peer to peer lending platform (NBFC-P2P), NBFC-account aggregator (NBFC-AA), non-operative financial holding company (NOFHC) and NBFCs not availing public funds and not having any customer interface.