You may often wonder as to how the HNI portion of an IPO gets oversubscribed by a massive margin. There are occasions when the HNI portion (above Rs.2 lakh investment) gets oversubscribed by 150 to 200 times. This is normally explained by funding. The idea is to get funding from a bank or a financier and invest in IPOs with a view to exiting the stock on listing. However, things are not as simple as they are made out to be. There are risks of IPO investing via the funding route. There are some important factors to be considered before investing in IPO through the funding route. Above all, the IPO funding process is slightly different from the normal IPO investment process.
While the IPO funding process requires more documentation in the form of your IT returns and your bank statements, the actual process is quite seamless and can be done online itself. Most of the banks and financiers provide funding for investing in IPOs and the risk is limited since there is a margin for the lender and they have the first lien on the shares. From an investor’s perspective, what are the factors that will determine the success of his IPO investment via the funding process?
Factors impacting IPO investing via funding
The following factors hold the key to whether you are able to make profits after considering your funding costs..
What are the funding costs for the IPO? Normally, higher the funding cost, lower are the chances of your making money on the IPO after the costs are factored. Rates on IPOs vary depending on the oversubscription anticipated but this is back-to-back funding and carries lower risk for lenders.
What is the extent of over subscription? Higher the oversubscription, higher is the share of funds locked in. Remember, you need to pay interest on the entire amount borrowed and not on the amount actually allotted. That is why higher oversubscription works against you as you are paying more interest on idle funds.
What is the price at which the IPO lists on the bourses. This is a function of a variety of factors like the market mood on the date of listing, the market view on the stock, the existing grey market premium etc. The subscription price needs to be substantially higher than the IPO price to actually make the scheme viable for the person availing IPO funding..
Let us look at how the IPO financing would have worked in 2 live cases from the Indian markets..
ParticularsIPO Financing for ThyrocareIPO Financing for UjjivanName of companyThyrocare Ltd.Ujjivan Finance Ltd.Industry of operationDiagnostic LaboratoriesMicro FinanceDiscovered Price of the IPORs.446Rs.210Listing Price of the IPORs.662Rs.230HNI Oversubscription225 times135 timesHNI Assumed application22500 shares27000 sharesHNI proportionate allotment100 shares200 sharesInterest cost calculation(22500*446) = Rs.1 crore
Days funded – 10 days
Interest (100 shares) – Rs.24,744
Interest/share – Rs.247/-(27000*210) = Rs.56.70 lakh
Days funded – 10 days
Interest (200 shares) – Rs.13,981
Interest/share – Rs.70/-Actual Cost of the IPO shareRs.693 (446 + 247)Rs.280 (210 + 70)Profit / Loss for the investorRs,(-31) loss after fundingRs.(-50) loss after funding
To understand the impact of funding on IPO investment, we have considered two live cases and assumed funding for a period of 10 days at 9% per annum. There is also an additional cost of documentation which are not considering at this point of time to keep it as simple as possible. The crux is that unless the IPO gets a very impressive listing despite a moderate oversubscription, it is quite difficult to make money net of funding costs. IN the above cases, the funding cost has added nearly 40-50% to your cost of the IPO. The loss post funding is a lot more conspicuous in the case of Ujjivan where the listing price was only moderately higher than the issue price. In case of Thyrocare, the listing price was at a healthy premium to the issue price but these benefits were largely eaten away by the 225 times oversubscription.
The moral of the story is that if you want to make money after considering the cost of funding then you need a combination of reasonable oversubscription and a healthy premium listing. Otherwise, IPO funding is not as simple and straight forward as it appears to be.