India has a vibrant grey market for equity initial public offers (IPOs).
In a first, the retail bond issue of the country’s largest bank, State Bank of India (SBI), is a hit in the grey market. Brokers in Ahmedabad, Mumbai, Delhi and other major cities are paying a premium to retail investors for applying on their behalf.
In grey market transactions, a retail investor acts as a front for a broker and purchases securities on his behalf. On the day of listing, the investor sells the securities and gives the broker the entire amount. In SBI’s case, the brokers are mainly dealing with their regular clients.
The premium being offered to retail investors, say market players, is Rs 320 per bond. Each bond has a face value of Rs 10,000. The brokers are offering up to Rs 16,000 per application of Rs 5,00,000 (maximum subscription amount).
It is a win-win for both the applicant and the broker, says a Mumbai-based trader.
“For a retail investor, it’s a risk-fee return of 3.2 per cent in 15 days. When calculated on an annual basis, the return is over 76 per cent. The brokers are taking a risk assuming the bonds will list at a premium of Rs 400,” he said.
The Rs 400 figure has been arrived on the basis of SBI’s first set of retail bonds. With a 9.5 per cent coupon rate for 15 years, the bonds are trading at a premium of Rs 400 to their face value of Rs 10,000 on the National Stock Exchange. The issue was launched last year.
The brokers believe the latest bonds, with a coupon rate of 9.95 per cent for retail investors, will list at over Rs 400. In fact, they expect the listing price to be much higher, as the previous issue was listed at a premium of Rs 600.
“There is good money to be made even if the bonds are sold at an average premium of Rs 380. Considering that the broker will pay Rs 16,000 per application of Rs 50,000, the premium paid for acquiring a bond (with a face value of Rs 10,000) is Rs 320,” said another South Mumbai-based broker.
There are over 80,000 sub-brokers in the country and over 10.05 million demat accounts. The brokers are keen to play this game as they are being offered 1-1.25 per cent commission on each retail application they bring.
SBI's previous issue was subscribed over 20 times. The markets are expecting a repeat performance.
The issue opened on Monday and will close on February 28.
