Can you borrow from banks to subscribe to an Initial Public Offering (IPOs), Follow-on public offering (FPO), and even for exercising ESOPs?
Yes, you can and the regulations permit such loans. Further, the Reserve Bank of India (RBI), through its two recent circulars, has provided clarity and consolidated applicable rules at one place. Master Directions on Commercial Banks-Credit Facilities issued in November 2025 and an amendment to above Master Directions in February, 2026.
In this post, let us understand what IPO/FPO/ESOP financing is, what is permitted, and what can go wrong.
What is IPO/FPO/ESOP financing?
When you apply for an IPO or FPO allotment, you must apply with the full subscription amount upfront. Technically, the amount is blocked in your bank account through ASBA (application supported by blocked amount). Now, if you are keen to invest in the public offering (IPO or FPO) but do not have the required sum readily available, you can take a loan from the bank to invest.
For Employee Stock Options (ESOPs), employees must exercise options by paying the exercise price to acquire shares. For instance, if the prevailing stock is Rs 100 and the exercise price is Rs 60, you must pay Rs 60 per share to the company to exercise those options. This can involve a significant outflow. And if you do not have the money, the banks can provide financing for such arrangements.
In all the above cases, the bank’s loan is secured against the very shares that will be allotted (IPO/FPO) or transferred upon exercise of ESOPs.
As I understand, the RBI has not put any restrictions on the tenure of such loans. However, this financing arrangement is usually short-term. Once allotment happens and the shares are credited, you (the borrower) can either sell shares to repay the loan or pledge them against a longer-duration Loan Against Securities (LAS).
How much can you borrow?
Parameter | Details |
Maximum loan per individual | ₹25 lakh (across all IPO / FPO / ESOP loans at the bank). This is across the banking system. |
Maximum loan-to-subscription ratio | 75% of the total subscription value |
Minimum cash margin by borrower | 25% of the subscription value (own funds) |
Collateral | Allotted shares to be pledged with the bank |
Note: The banks cannot lend to their employees for subscribing to the bank’s own IPO, FPO, or exercise of ESOP.
Let us understand this with the help of an example.
An IPO lot requires a subscription of Rs. 15,000. A bank may finance up to Rs. 11,250 (75%), provided you contribute Rs. 3,750 (25%) from their funds. Upon allotment, the bank marks a lien on the shares. After the allotment, you can sell the stocks to repay the loan. This is also the logical step if you invested for listing gains.
Alternatively, if you want to hold the shares for a longer duration, you can request the bank to convert the facility into a longer tenure Loan against Securities (LAS). Note that the margin requirements are different for LAS. 60% LTV or 40% margin.
The mechanics will be similar for an ESOP loan.
Do not ignore the risks
Loans add leverage. And leverage cuts both ways. While it can amplify gains if your call goes right, it can amplify your losses too if your call goes wrong.
Hence, I do not advise anyone to borrow short-term to invest in stocks. No matter how sure-shot the IPO looks, things can always go wrong. Hence, avoid loans for IPO investing. IPO financing can look attractive when the markets are buoyant. However, you must allow for the possibility that the stock can list at a discount (after IPO) to the issue price and in such a case, losses can pile up quickly because of leverage.
My answer may be slightly different in case of ESOPs if the exercise price is at a massive discount to prevailing stock price because a discount adds to the cushion.
And this is not the only risk. Let us list the major risks involved.
Listing Price Risk
Your shares list at a discount but you still owe the bank the full amount.
You invest Rs 2,500. The bank lent Rs 7,500. You invested Rs 10,000.
The share lists at 15% discount. The value of shares is now Rs 8,500.
You still owe the bank Rs 7,500. If you sell the stock now to pay off the loan, you will be left with Rs 1,000 after loan closure. Hence, while the stock fell 15%, you lost 60% of your capital.
I have not even considered the interest cost of the loan in this analysis. The interest cost becomes a much bigger factor in case of non-allotment.
Non-Allotment Risk
This is another risk, especially for IPOs.
What if you do not get due allotment due to oversubscription?
You applied for 10 lots but got just one.
Let us say each lot was Rs 1 lac. You borrowed Rs 7.5 lacs (75% of the subscription amount) and used Rs 2.5 lacs from your own funds. You got only 1 lot.
However, you must still pay interest over the entire borrowing of Rs 7.5 lacs. While the hit is only for a few days, the cost can be high for large subscription amounts.
For instance, Rs 7.5 lacs borrowed for a week at 15% p.a. is about Rs 2,163 in interest. That is not a small amount for an allotment worth Rs 1 lacs. The non-allotment has shifted your breakeven point upwards. The stock must go up by at least 2.2% for you to just break even.
While the two RBI circulars bring clarity about IPO/FPO/ESOP financing, it does not convert an inherently risky pursuit into a less risky one. With FPOs, since the stock is already listed, it is difficult to have irrational expectations and indulge in mindless borrowing. With ESOPs too, if the stock is already listed and you can excel at a discount, you can do a simple excel analysis to assess borrowing risks. IPOs are pure sentiment and the listing price can go anywhere. Even events completely unrelated to the company can sour the market mood and hurt listing prospects. While you may still choose to take leverage for IPOs to magnify returns to increase the odds of subscription, do not ignore the risks.