IPO rush: Riding the margin financing wave

PALAK SHAH, KS Badri Narayanan Mumbai/ Chennai | Updated on August 06, 2021

Banks and NBFCs have been funding institutions, HNIs to subscribe to initial public offers

Margin financing has emerged the catalyst for the Great Indian IPO rush. In July, 10 companies wanted to tap the primary market to raise ₹18,400 crore but their IPOs received bids worth a whopping ₹8.86-lakh crore. Nearly 98 per cent of this subscription money came through margin financing, which has fed the IPO frenzy in India, the sources said.

IPOs are getting subscribed within a few hours of launch. All four IPOs that opened on Wednesday were subscribed more than two times at least.

Investment bankers and market experts told BusinessLine that Mumbai’s top non-banking finance companies (NBFCs) and banks funded IPO subscriptions of over $100 billion in July alone with most deals cut for the Zomato IPO.


Demand-supply game

“Nobody knows how and when Zomato will make profits that can justify its valuation. But every savvy market trader knows that the IPO listing gain is a demand-supply game. NBFCs and banks provided 99 per cent margin finance to institutions, including several mutual funds, and high net worth individuals. It just costs ₹1.20 lakhto bid for shares worth ₹1 crore,” a leading investment banker in Mumbai said.

The sentiment cycle

Zomato, with an IPO size of ₹9,375 crore, got bids for ₹3.58-lakh crore, that is, subscribed nearly 39 times. Bankers say these mind-boggling over-subscription and grey market premium of an IPO drive sentiment and ensure strong demand post listing.

The spectacle attracts more subscribers to subsequent IPOs and the party goes on, experts say. The HNI portion in the Zomato IPO was subscribed nearly 33 times and the institutional portion 52 times.

“In the current system, a significantly large portion of IPO subscription is through margin financing. It is prejudiced towards the overall expansion of investor base as IPOs are largely cornered by moneybags.

“Excessive leverage should be kept under check as investors suffer when markets crash,” said Deven Choksey, MD, KR Choksey Investment Managers.

Small outlay, big gains

Unlike retail investors, HNIs and institutions have no limit on the number of shares or the amount they can bid for in an IPO. HNIs have to bring in only ₹1 crore of their own for a bid worth ₹100 crore as 99 per cent of funding can be got from NBFCs.

The lenders charge 10-15 per cent per annum on the funds they provide. So, the risk for an HNI on a ₹ 100-crore bid is just ₹20 lakh (the interest cost for 3-5 days from bidding to listing).

Since 15 per cent of an IPO is reserved for HNIs and 50 per cent for institutions, their allotment is often enough to cover their interest cost as their bids are extremely high. On listing, Zomato’s share rose over 63 per cent giving enough opportunity for the leveraged players to get out. Leveraged play through margin financing is India’s IPO game. Bankers are happy, companies are happy and, of course, a large number of investors who know how to get out at the right time,” the banker said.

Published on August 04, 2021

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