Rich investors left with little after listings

Over-subscription, rise in IPO loan rates push up costs, eat into listing gains

Rich investors who put in money in the recent Initial Public Offerings (IPOs) of Ujjivan Financial Services and Thyrocare Technologies and exited on the listing day made little or no gains despite the shares posting significant gains over their respective issue price on day one.

High over-subscription levels and a spike in interest rates pushed up the acquisition cost of shares of these firms, eating into listing gains, said experts. The portion reserved for rich or high net worth individuals (HNIs) was subscribed 135 times and 225 times for Ujjivan and Thyrocare, respectively. IPO loan rates quoted for both Ujjivan and Thyrocare were nine-9.5 per cent per year, compared to 7.5-8.5 per cent charged for earlier issues.

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 or in the first few days of listing. Since shares list within seven days of closure of the IPO, loans are typically given for a matching period. HNIs that avail of IPO financing mostly prefer existing on the first day itself.

Shares of Ujjivan and Thyrocare posted listing-day gains of 10.3 per cent and 38.6 per cent, respectively. Assuming an interest rate of 9.5 per cent, the cost of acquiring one share of Ujjivan came to Rs 261 (at an interest cost of Rs 51). On the day of listing, Ujjivan shares hit a high of Rs 244 and closed at Rs 231, well below the acquisition price.

At the same rate of interest, the cost of acquiring one share of Thyrocare was Rs 625 (interest cost of Rs 182). Thyrocare shares touched a high of Rs 665 and ended at Rs 618. At an average exit price of Rs 650, investors made Rs 25 or about four per cent.

“While the shares of Ujjivan and Thyrocare did well on the day of listing, it was not enough to recover the cost of funding. Investors borrowed willingly because the grey market premiums indicated robust listing gains. However, they under-estimated the oversubscription levels, which pushed up costs significantly and leading to a listing price that was lower than the grey market prices,” said Arun Kejriwal, director, Kris Securities.

Interestingly, investors in Equitas Holdings, which listed in the third week of April and ended with listing-day gains of 23 per cent, earned healthy returns of 16 per cent after accounting for the funding cost. The HNI portion of the issue was oversubscribed 57 times and funding costs were 7.5-8.5 per cent.

According to sources, NBFC arms of brokers such as Edelweiss, IIFL, JM Financial, Reliance Securities, Kotak Securities, and Aditya Birla Money, collectively did IPO financing business of Rs 50,000 crore from the IPOs of Equitas, Ujjivan and Thyrocare.

Similarly, in December 2015, the NBFCs collectively did a business of about Rs 30,000 crore from Alkem and Dr Lal PathLabs, with the former contributing about two-thirds to the financing book.