Thinking of borrowing to invest in IPOs? Here’s what you should know

livemint.com:

India's primary markets have seen a deluge of initial public offerings (IPOs) in recent months, drawing in eager investors hoping to grab shares of high-profile companies. 

However, with most IPOs getting oversubscribed, securing an allotment has become increasingly challenging. To boost their chances, some investors are turning to IPO loan financing—a strategy that allows them to bid for a higher number of shares than their available capital would typically permit. 

Read this | Why you should approach the SME IPO market with extreme caution

While this approach can be tempting, leveraging to invest in IPOs carries significant risks. Before you jump in, it’s crucial to understand how this financing works, its potential rewards, and the pitfalls that can turn your investment into a costly gamble.

IPO loans are short-term borrowings that allow investors to bid for a higher number of shares than their available capital might permit. Typically, these loans come with a tenure of 7 days and interest rates of 8-15%. Lenders set both minimum and maximum loan limits, with ₹1 crore being the regulatory cap. However, for most investors, ₹10 lakh is sufficient to qualify for the big high net-worth individual (HNI) category, where chances of allotment are theoretically higher.

That said, in heavily oversubscribed IPOs, the allotment is often limited to shares worth ₹2 lakh or none.

Read this | Struggling with IPO allotments? Tips to boost your chances

Lenders also require borrowers to pay a margin upfront, which is a portion of the total bid. The remainder is financed by the lender.

After you pay the upfront margin, the lender releases the remaining funds needed to bid for the desired number of shares. Both the margin and loan amounts