HNI demand for IPO loans sees surge

Robust appetite from rich investors has driven down financing costs to as low as 5%

An increasing number of wealthy individuals are applying for equity Initial Public Offers (IPOs), buoyed by the healthy listing gains in some of the recent ones.

This high demand has, in turn, driven down interest cost and given a fillip to the IPO financing business of the non-banking financial company (NBFC) arms of domestic brokerages.

On Tuesday, the Rs 1,200-crore public issue of RBL Bank garnered an overall subscription of nearly 70 times. Of these high net worth individuals (HNIs) bid for nearly 200 times the number of shares on offer. As a result, the NBFC arms of brokers such as Edelweiss, IIFL, JM Financial, Reliance Securities, Kotak Securities, and Aditya Birla Money collectively did a business of about Rs 36,000 crore from the IPO, one of the highest in recent times, said sources.

Other recent IPOs of Advanced Enzyme Technologies, Thyrocare, Mahanagar Gas, Ujjivan Financial Services, Equitas Holdings and TeamLease Services did a business of anywhere between Rs 12,000 crore and Rs 30,000 crore per issue.

“Investors are realising that leveraging is paying off. This has created more demand and driven down interest rates, increasing the chances of making more money,” said Arun Kejriwal, director, KRIS, an investment advisory firm.

The interest charged on financing of IPOs was 4.5-5 per cent for the RBL Bank issue, far lower than the seven to nine per cent for offerings earlier in the year. Experts say funding demand and interest rates largely depend on the subscription figures that build up during the course of an IPO. Their short listing period makes the process of financing from an NBFC lucrative for both investor and financier.

“The recent IPOs are leaving enough money on the table for investors, which has created sizable demand for new offerings,” said Prasanth Prabhakaran, head, retail broking, IIFL.

IPO loans are typically availed of by HNIs confident of a company listing at a significant premium, giving them the scope to exit the stock on the first day itself or in the first few days of listing. Since shares list within seven days of an IPO's closure, loans are typically given for a matching period. HNIs that avail of IPO financing mostly prefer existing on day one.

Of the past eight issues (see table) that garnered a robust demand from HNIs, seven ended with listing gains of 10 to 40 per cent.

However, some are a bit alarmed at the 'excessive' demand. “The entire funding mechanism is largely benefiting people with deep pockets. In a lot of these issues, artificial demand is being created because of the limited supply. So, instead of applying for 10 shares, HNIs will apply for 100 shares, as 90 per cent of the money will be funded by the NBFCs,” said Deven Choksey, managing director, KR Choksey Investment Managers.