IPO Funding Explained: Process, Benefits, and Risks

IPO Funding, or IPO financing, refers to the short-term loan provided to investors to invest in the upcoming IPO of any company. Think of it as a loan facility given solely for investing in IPOs. It allows you to bid more than your current capital allows.

Once the IPO shares are allotted, you have two choices:

• Sell the allotted shares and repay the loan using the sale proceeds, or
• Repay the loan from your own funds and keep the shares in your Demat account for long-term holding.

Both banks and NBFCs (Non-banking Financial Corporations) can provide this facility to investors, but primarily HNIs (High-net-worth individuals). While banks have a maximum limit of ₹25 lakhs, the same for NBFCs is up to ₹1 crore.

The entire IPO financing process, from funding to loan recovery, consists of seven steps. Here's a breakdown of how IPO funding works:

1. Opening a POA Account with Bank/NBFC:

   Whenever a person (or investor) approaches a bank/NBFC for IPO funding, the latter will advise them to open a Power of Attorney (POA) account with the respective financial institution.

   Even if they have already opened a demat account, the investor still has to open a POA account. This account has its own purpose. Therefore, the customer (investor) cannot withdraw funds from it.

   In short, it gives the bank the power to operate the account, fund it, and recover the amount when required.

2. Depositing Margin Amount:

   Once the account is opened, the investor must deposit the required margin amount, along with any applicable interest charges.

   For instance, let's say a person wants an IPO loan of ₹10 lakhs. ₹2 lakhs will act as the margin, and a few thousand will be charged as the interest amount.

   However, the deposited amount cannot be withdrawn by the borrower.

3. Funding the IPO Application:

   After the margin is deposited, the bank or NBFC lends the remaining amount required for the IPO application. The loan amount is transferred directly to the POA account, from where the IPO application is submitted on behalf of the investor.

   This ensures that the investor enjoys higher allotment potential while the bank secures its lending through its POA arrangement.

4. IPO Allotment & Share Credit:

   Once the IPO allotment process is completed, there are two possible outcomes: allotment or refund.

   • If shares are allotted:

     The shares are credited directly to the demat account linked with the POA. However, since the lender (bank/NBFC) has funded the application, the shares remain under their lien (pledge) until the loan is repaid.

   • If shares are not allotted:

     The refund amount (the loaned and margin funds) is automatically credited back to the POA account

     In either case, the investor does not have direct control over the funds until settlement is completed.

5. Loan Recovery / Repayment Process:

   If the investor receives an allotment, they must repay the loan (above margin) within the agreed timeline. Once the repayment is complete, the financier removes the lien on the shares, and full ownership transfers to the investor.

   However, if the investor fails to repay within the stipulated time, the financier reserves the right to sell (or liquidate) the allotted shares on the market to recover the dues.

6. Refund Settlement (in case of no allotment):

   Considering there is no allotment, the bank or NBFC will perform two actions:

   • Withdraw the provided loan amount (above margin) from the POA account.
   • Deduct the interest charges from the margin deposit and credit the remaining balance back to the account.

   Once this settlement is complete, one can access and withdraw your deposited amount.

7. Closing or Reusing the POA Account:

   Once the IPO process (from application to repayment/refund) is complete, the POA account remains active for future IPO funding requests. The investor can reuse this account, provided they continue to avail themselves of IPO funding from the same bank/NBFC.

   If the investor decides to discontinue, they can request account closure after clearing all pending obligations.

For more insights on IPO-related investment opportunities, check out our guide on What is IPO and How to Invest.

With the growing surge of IPOs, many investors rush in to book their entries. However, money issues discourage many people from applying to it. However, with an IPO funding facility, investors can invest in their desired IPO. Also, they can increase their chances of allotment by applying for more lots.

Here are some reasons why people prefer IPO financing:

• Leverage Opportunity -Enables investors to apply for a larger IPO amount than their available capital.
• Better Allotment Chances -A higher application value (in the respective category) can increase the probability of share allotment.
• No Need to Liquidate Assets -Investors can participate in IPOs without selling existing investments.
• Short-Term Funding -Funds are usually blocked only for a few days, offering quick turnover.
• Convenient Process -Banks/NBFCs handle the entire application, allotment, and refund process.

Many banks and NBFCs will ask for the following documents for IPO funding.

• Indian resident (18 years or older)
• PAN and Aadhar card
• Valid bank account
• Copy of Bank Statement for the last 3-6 Months
• Registered Demat and trading account
• Income proof
• Address proof
• ITR copy
• Satisfactory credit history

Before availing any IPO funding facility, one must consider the downside and the charges that are complementary to this service.

• Interest and Processing Fees - IPO financing isn't free money. Banks and NBFCs charge interest for the borrowed amount, along with a small processing fee.
• Risk of Market Volatility– If the stock is listed below the issue price, the investor may incur a loss.
• Allotment Uncertainty- Funding a larger IPO amount doesn't guarantee allotment.
• Limited Control-Due to restricted access, the investor cannot access or withdraw funds from the POA account.
• Margin Requirement -Even with a financing activity, you'll still need to pay a margin amount (typically 10–25% of the IPO value, which may vary). Hence, ensure you have sufficient funds ready before applying, as this amount cannot be withdrawn until the settlement is complete.
• Repayment Pressure –The loan must be repaid within the mentioned timeframe after allotment, regardless of profit or loss.
• Eligibility Restrictions -Only investors meeting specific credit and KYC norms qualify for financing.