The demand for initial public offering (IPO) financing is expected to remain buoyant amid a strong issue pipeline. According to Icra, wealthy investors could borrow up to Rs 70,000 crore per issue to apply for good large-sized IPOs. Currently, the average demand is between Rs 17,500 crore and Rs 22,500 crore per IPO.
Typically, high net worth individuals (HNIs) make leveraged bets in IPOs to make listing-day gains. As the HNI portion of an IPO with high investor interest sees huge demand, investors have to make a big-ticket application in order to increase the chances of allotment. Non-banking finance companies (NBFCs) finance this money by charging interest between 9 per cent and 12 per cent (per annum) for seven days. The average subscription in the HNI portion for IPOs in the past one year has been more than 80 times. For instance, the nearly Rs 1,900-crore IPO of Avenue Supermarts saw
applications worth nearly Rs 80,000 crore — 278 times the shares on offer — in the HNI category.
“The IPO financing market was very vibrant in 2016-17, supported by an increase in HNI investors’ interest in IPOs in the quest for listing gains.
With banks not active in this segment due to regulatory restrictions, the field is dominated by NBFC arms of some of the leading players in the capital markets and wealth management businesses,” said Karthik Srinivasan, senior vice-president and group head-financial sector ratings, Icra.
A favourable market outlook and healthy post-listing performance has resulted in a surge in HNI interest towards IPOs. According to Icra, the median HNI subscription in IPOs in 2016-17 was 80 times, compared with just two times in 2015-16. “This has created a market for providing short-term capital to the HNI investors for funding the IPO application,” the rating agency said.
IPO An investor applying in the HNI category has to provide small upfront capital (called margin money), while the rest is funded by NBFCs.
Industry players say the financing cost has come down after the markets regulator reduced the time taken between the closing of an IPO to listing from 13 days to just seven days. The lower costs have brought down the break-even for HNIs. But, for IPOs such as Avenue Supermarts, which saw massive demand, the break-even costs increases as HNIs have to borrow more.
For instance, HNIs would have made money in Avenue Supermarts if the stock would have listed at a 50 per cent premium. It is a different story that the stock surprised everyone by doubling on listing day.
“An analysis of the issuances during the period April 2016 to June 2017 shows that of the total of 31 issuances, 24 issuances were listed at a premium, with median listing gains of 14 per cent. However, after factoring in the interest expense, the HNI investors would have made positive returns in only 11 issuances,” Icra said.
The rating agency said the key source of funding for NBFCs was mutual funds (MFs), which are seeing an increase in assets under management. MFs also get a chance to earn higher yields compared to investments in government securities, improving their overall returns, Icra said.
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