Spectacular returns by the recent initial public offerings on listing day are prompting a growing number of retail investors and even high net worth investors to borrow funds at a costly 16 to 17 per cent (for two or three weeks) to bid for IPO shares.
"Several brokerage houses have back-to-back arrangements with banks for IPO financing. The oversubscription of recent IPOs shows that liquidity conditions are very good," said Rajnish Rangare, head-Capital Markets, Karvy.
The trend has accelerated because some recent IPOs have offered more than 100 per cent returns within days of listing.
For instance, Motilal Oswal Financial is trading at Rs 1,716, up 108 per cent from the issue price of Rs 825 since its listing in mid-September. Maytas Infra trades at Rs 899, up 142 per cent from the issue price of Rs 370 since its listing on October 25.
The prospect of such handsome returns has resulted in recent IPOs being subscribed many times over.
The more the issue is oversubscribed the higher the interest cost per share. "Investors can make sufficient profits even if they are allotted 1/10th of the total amount invested and the scrip gets listed at a premium," said R Ramnath, vice-president (Investment Banking), Srei Capital Markets.
Reji Jacob of JRG Securities, which plans to enter IPO financing, said this type of financing was more common in the smaller cities rather than big cities like Mumbai.
The arrangement works as follows: The investor gets into a tripartite agreement with her/his depository participant (which is normally the local broking firm's associate) and the lender (banks or a non-banking finance company).
The money is returned to the bank if the applicant is not allotted shares. If the shares are allotted, the account of the DP, which has an arrangement with the lender, will be credited with the shares.
The reason the demand for IPO finance has grown is that retail investors have to put in 100 per cent of the amount on application.
Rules stipulate that 35 per cent of the shares offered through IPOs should be reserved for retail investors -- those who apply or bid for securities for a value of not more than Rs 100,000.
So investors often apply through different accounts for shares for which the values of applications are in multiples of Rs 100,000 to qualify for the retail category. The 100 per cent payment, thus, results in a substantial initial outlay.
