Primary issue financing was the furious fashion during the primary market boom of the mid-nineties. With primary market activity coming to a standstill since then, financing of new issues also got a quiet burial.

Of late though, courtesy the buoyant primary market for software scrips, it is witnessing an aggressive resurrection. Citibank, Birla Global Finance, HDFC Bank are a few of the intermediaries which are very active in the market. Birla Global for instance, has effected deals worth over Rs 1,100 crore in the last few months.

Returns sans risks
What makes the business more interesting is that it promises almost risk free returns. Nothing unholy about it all of course. For, only those issues that are expected to be heavily oversubscribed are financed. The margin that the lender demands is inversely proportional to the expected oversubscription rate. For instance, Birla Global kept 50% margins for the Vintage issue, while for Polaris issue it was 25%.

The reasoning is simple. Assuming a person applies for 1,000 shares of Rs 10 each and the margin is 25%, the bank effectively advances Rs 7,500. If the issue gets oversubscribed 10 times, the applicant would be allotted only 100 shares.

The balance Rs 9,000 would be refunded to the lender as the application has to be made jointly with the lender. The refund, as is obvious, more than takes care of the amount lent. Interest at 18% for 30 days is also collected upfront.

Who gets the pie?
There is also an interesting side effect. With 75% of the capital required available through loans, an investor tends to apply for a large number of shares. This results in demand, and oversubscription, higher than what fundamentals merit.