IPO - HNIs CALL THE SHOTS!

By Ruma Dubey

Music Broadcast had made a fantastic debut on 17^th March. The stock got listed on the BSE at Rs.420 v/s its issue price at the upper band at Rs.333. Two days later, it seems to be losing all the fizz, going flat like an open bottle of soda. Yesterday, it hit a new 52-week low at Rs.358.50 and today too, a new low at Rs.351.65. It continues to trade in the red currently.

The issue had got an overwhelming response – it got subscribed 39 times with institutional investors subscription at 40.4 times, HNIs at a huge 111.6 times and retail portion at a measly 9.4 times.

And today’s blockbuster debut left everyone gaping. Avenue Supermarts or the D-Mart stock got listed on the BSE at Rs.604.40, as against the IPO price of Rs.299, a jaw-dropping 102% upside listing!

This IPO too had received an overwhelming response – it was subscribed 104.59 times; the issue was for Rs.1326.70 crore and it received bids totaling Rs.1.38 lakh crore. Institution portion was subscribed 144.62 times and HNI was at a huge 277.74 times. Retail investor portion was very small at 7.51 times.

The common aspect in both these new listings is very apparent – huge oversubscription, huge portion of HNIs, very miniscule retail investor participation and obviously, mega listing gains!

Avenue Supermarts is on day-one today, so we do not know yet how long this blockbuster price is sustainable but fall it will from these heights.

This is not a new thing – IPOs have always been driven by HNIs and over a period of time, retail investors have been relegated to being just fringe by-standers. IPOs have become a huge game for HNIs, probably the most lucrative investment avenue in today’s time as real estate and gold remain lackluster.  

We say that listing gains in hugely HNI oversubscribed issues will not sustain for too long with 100% conviction. This is based on pure and simple logic. HNIs have big money but they bring in only a small a portion, the rest is all through IPO funding.

This is like a short term loan – usually for 10 days, which banks and other financial institutions provide to investors to fund their IPO application. Banks and Non Banking Financial Corporation (NBFC's) generally fund a part of IPO application while remaining is provided by the applicant. IPO Funding by banks is governed by RBI which allows banks to loan up to Rs 10 Lakhs for IPO Funding. The Loan Amount, Interest Rates and Duration of the loan vary from IPO to IPO.

Take the case of DMart. Suppose an HNI was applying for 10,000 shares, where he is assured of an allotment of 100 shares, at the IPO price of Rs.299/share, he will have to shell out a total of Rs.29.90 lakh. But the HNI puts in only 9%, which in this case is Rs.2.71 lakh and the balance, Rs.27.18 lakh comes through IPO funding. He needs to pay an interest on this amount. Currently for this issue, it was at an average of 10%. If this funding was for 15 days, he needs to pay Rs.11,171, this means his per share interest cost will come to Rs.112. Total cost of HNI incurred on per share of Avenue Supermarts would be Rs.411 (299+112).

Almost everyone had assumed, based on the grey market activity that the stock would get listed at Rs.450. Thus the HNI was working on a 9.5% return for 10 -15 days. But surely he would have been pleasantly shocked to see the listing at Rs.604; this means today alone, his listing gain was at 47% higher, that too in 10 days. HNIs most certainly made a killing in this issue!

At the same time, this funding pattern is a pointer to the fact that most HNIs will sell out and take the profit home. With over 277 times HNIs subscription, when most opt to sell out, isn’t it most logical that the stock price will not sustain this high price for too long? The stock is holding strong currently at Rs.630; like Music Broadcast, let’s see where the price goes in a couple of days.

So what does the retail investor do? Most would have to suffice with a very small allocation; one can sell and accumulate the listing gains and renter the stock for long term once all this HNI induced euphoria dies down.

With listing now happening in 6 days from the earlier 12 days after issue closing, listing gains could become the norm in the coming days.