The Hindu Business Line : Banks fight shy of funding IPOs

IPO funding, a hot business for banks a couple of months back, today surprisingly creates no euphoria despite the spate of large public issues hitting the primary market.

The main concern stems from the possibility that these issues may not be oversubscribed. With several mammoth issues all opening together, the scope of over-subscription in the retail segment seems limited. This reduces the scope for appreciation of the share price on listing. Both these factors do not augur well either for the investor or for the financing bank.

Explained Mr Kaushik Bagchi, Senior Products Manager, Capital Markets, IDBI Bank, "The whole success of IPO funding from the customer's and the bank's perspective hinges on the extent of over-subscription of the issue. As the level of over-subscription for an issue increases, the higher is the ease of repayment of the loan for the borrower and the lower is the risk for the bank. The over-subscription in the retail segment in the upcoming issues will not be as high as in the TV Today or Indraprastha Gas Ltd issue; therefore, banks are not likely to aggressively sell this loan product at the moment."

How does over-subscription favour the borrower and the banker? The logic behind it is best explained with an example. Suppose a retail investor makes an application for Rs 50,000 worth of shares in a public issue. He will get a bank loan of up to Rs 25,000 on bringing in margin amount of an equivalent Rs 25,000. If the issue were to be fully subscribed with no over-subscriptions, the investor would get shares worth Rs 50,000 and no refund. The burden of the loan would continue for the investor and the bank would have the higher responsibility of monitoring the price of the shares to ensure that the RBI-stipulated 50 per cent margin is maintained.

Chances of listing at a premium would be low since there was no over-subscription and if the price of the share were to plunge in the secondary market, the borrower would have to top up the margin before the bank decides to liquidate the shares.

Loans for IPOs typically terminate in 15-30 days, but could run into as long as six months before the borrower could pay up the requisite amount. Now suppose the issue were to be over-subscribed say twice, the applicant would get shares worth Rs 25,000 and a refund worth Rs 25,000, which would automatically go to repay the loan. The higher the level of over-subscription, the shorter and safer the loan for both parties involved.

This is not the only dampener for the IPO financing. According to Mr Neeraj Swaroop, Country Head-Retail, HDFC Bank, "With so many public issues lined up - many of them simultaneously — banks will have to finance only small amounts in some selective issues since they have to adhere to the 5 per cent cap on equity exposures.''

Challenges are also foreseen on the operational front for all players involved, banks, broking houses and merchant bankers.

"Operational difficulties will crop up in financing all these issues simultaneously. My branch level staff are not infinite in number,'' said Mr Bagchi.

Despite the obstacles ahead for IPO financing, there is a unanimous optimism in the market that the Rs 20,000-crore issues will sail through smoothly with major participation coming in from institutions.