It is turning out to be a miserable August for high networth individuals (HNIs) as far as initial public offerings go. The much-hyped CarTrade Tech issue listed at a discount on Friday, making it the fifth loss-making IPO for this category of investors. Only two issues—Exxaro Tiles and Devyani International—have been profitable for HNIs this month so far.
The Cartrade Tech IPO
listed at Rs 1,600, against the issue price of Rs 1,618. It finally closed at 1,500.10, a discount of Rs 117.9 or 7.29 percent to the issue price.
The debacle also shows that investors are getting increasingly cautious about where they want to buy in this market. The prolonged spell of weakness in midcap and smallcap shares is prompting many to move their money to safer pockets of the market.
Unlike retail investors who invest their own funds, HNIs make outsized bets on IPOs using borrowed money. As a result, for HNIs to make a decent profit on their investments, the listing price has to be above the issue price plus the cost of interest. What makes it tricky for HNIs is that while they may bid for, say 50,000 shares, using borrowed money, they may be allotted far lesser number of shares depending on the number of times the non-institutional investor portion (reserved for HNIs) of the book is subscribed. If the NII portion is subscribed 100 times, it means an HNI will be allotted only one share for every 100 shares that he has bid for. However, he has no way of knowing how many shares he will be allotted and so will bid for as many shares as he can. At the same time, he will have to pay interest on the entire quantity of shares he has bid for.
So if he is bidding for 50,000 shares and has been allotted only 500 shares, he will still have to pay interest on all the 50,000 shares. This means the cost of funding will now have to be divided among the 500 shares, thus pushing up the breakeven price on listing day. The higher the number of times the NII portion of the book is subscribed, lesser the allotment and so higher the breakeven price.
What this means is that HNIs may not make money in some issues even if it lists at a 25 percent premium to the issue price.
This was evident in the Rolex Rings IPO
where HNIs lost money despite the shares listing at a 30 percent premium to listing price. Interestingly, HNIs who bet on Exxaro Tiles
would have still made a profit despite the lackluster listing because the NII portion of the book got a relatively tepid response in comparison to other categories.
|Issue price (Rs)||NII subscription (times)||Funding cost @7.5% (Rs)||Breakeven price (Rs)||Listing price (Rs)|
Gain/(loss) in Rs
Glenmark Life Sciences