Typically, when an initial public offering lists at a discount to the issue price, the investor category which loses the most money is that comprising non-institutional investors, known in market parlance as high-networth individuals (HNIs).
That’s because unlike institutional investors and retail investors, HNIs or wealthy investors subscribe to IPOs using borrowed funds, mostly from non-banking finance companies. The leverage could be as high as 80-99 times, depending on the NBFC’s relationship with the investor. Simply put, a wealthy investor willing to put up Rs 1 crore for subscribing to an IPO could borrow Rs 99 crore from NBFCs and bid for Rs 100 crore worth of shares.
Currently, the rate of interest ranges between 7.5-8.0 percent.
However, in the case of the Paytm IPO, most HNIs chose to stay away because of concerns over expensive valuations and also funding constraints.
The NII portion of the book was subscribed 0.24 times, meaning for every 100 shares available for HNIs, there were bids for only 24 shares. Using borrowed funds increases the cost of subscribing to an IPO for an HNI, because of the interest cost.
To make a profit on listing day, the stock should open at a price higher than the sum of the issue price plus interest charges.
Strangely, the same NBFCs eager to fund IPOs of lesser-known companies were suddenly hesitant to give anything more than 9-10 times for the Paytm IPO. In other words, for the Paytm IPO, Rs 1 crore of own money could only get Rs 9 crore from NBFCs.
Brokers say the size of Paytm’s NII book (around Rs 6,400 crore) and the less than enthusiastic response from domestic mutual funds in the anchor round, were the reasons NBFCs were cautious about lending funds to HNIs.
It is the least risky and most profitable for NBFCs when the issue size is small, and the NII portion is heavily subscribed. In such a situation, an HNI is allotted far fewer shares than he or she had bid for. Assuming an HNI has bid for Rs 100 crore worth of shares on 99 percent leverage, and the NII portion gets subscribed 50 times, the investor will be allotted only Rs 2 crore worth of shares.
The NBFC has already pocketed interest on the remaining Rs 98 crore and taken its money back. Of the Rs 2 crore worth of shares allotted, Rs 1 crore is the HNI's money. Even if the issue lists at a discount, the loss will be adjusted from the client’s funds.
But when it comes to outsized issues, there is a possibility that the NII portion won't be subscribed heavily.
The worst-case scenario for an NBFC will be the investor being allotted 100 percent of the shares bid for. While the NBFC will earn interest on the funds, the entire money will be locked till listing day. And for every share allotted, only 1 percent is the HNI's money. If the issue lists at a huge discount, clients' share of funds may not be enough to cover the losses and will have to be recovered later on.
With most domestic mutual funds cool to the issue and NBFCs reluctant to fund, HNIs too had second thoughts about betting big on the issue with their own money.
Paytm shares listed at a 9 percent discount to its issue price of Rs 2150 and later crashed to the lower end of the 20 percent intra-day filter. There were no buyers in the stock at Rs 1564.15 on the BSE, 20 percent below the pre-opening discovered price of Rs 1955, and 27 percent below the issue price.
(Edited by : Aditi Gautam)
First Published: IST