Check seen on broking cos’ IPO fund use

Aug 03, 2007
Ashish Rukhaiyar
MUMBAI

DOMESTIC broking houses looking to raise money through initial public offerings may have to be more forthcoming on what use the funds will be put to. Else, they may not find it easy to get the green light for their public issues.

With the four-year bull run continuing, despite some hiccups, broking houses are in the midst of a mad rush to expand operations. Obviously this requires funds. But, this is not the sole reason why these firms are looking to raise funds. Many brokerage houses have floated non-banking financial companies (NBFCs) to cater to the highly-lucrative margin funding business.

Some market watchers are worried that money raised through the IPOs may find its way into these NBFCs. Industry sources added that the market regulator, Sebi, might design some additional set of disclosures, or in other words, ask for more clarity as to how the proceeds would be used in order to stop them from flowing into the NBFC. However, nothing concrete has been done as yet, they said.

“Sebi has definite and genuine concerns about the misuse of the money,” said Prime Database managing director Prithvi Haldea. “Regulation is an ever-evolving process and going ahead, Sebi might think of additional disclosures for the brokerage sector, too, like they did for the real estate companies sometime ago,” he added. Meanwhile, an email query sent to Sebi remained unanswered.

Margin funding is a lucrative business for most broking houses that demands huge capital. While there are clear guidelines as to how a broking house can do margin funding business, there are many grey areas when it comes to an NBFC. Hence, it comes as no surprise that most broking houses have an NBFC arm, which takes care of the margin funding.

“Almost all broking houses do margin funding business through their respective NBFCs in a nontransparent manner,” said an investment banker. “A statement like ‘money will be used for expansion plans’ in the objects of the issue is quite ambiguous and allows a broking house to invest the money in a subsidiary that deals in margin funding business,” he added.

Another investment banker added that the industry’s infrastructure costs are not very high. “If a broking house says that it would be using Rs 100 crore for expansion purposes, then there is definitely something worth looking into. Only an NBFC requires such high capital,” he added.

Interestingly, the time is ripe for the market regulator to frame additional disclosures as quite a few broking houses have lined up their IPOs. While Motilal Oswal Securities is in the final stages of launching is public issue, according to Prime Database Anand Rathi Securities, Angel Broking, Religare Securities, Sharekhan and Ventura Securities are some of the other entities that are planning to tap the market.

UNDER SCANNER
* Almost all broking houses have an NBFC arm to cater to the margin funding business
* These NBFCs are capital intensive businesses
* Broking houses divert IPO proceeds to fund the NBFC arm, say sources