Brokerages advise HNIs against bank finance for small IPOs

Mumbai, March 28 | Updated: Mar 29 2005, 05:48am hrs
Brokerages are advising their high net worth individual (HNI) clients not to use bank finance to buy small initial public offerings (IPOs) lest their category may receive more subscriptions resulting in smaller or nil allotment. The allotment to this category of investors is made on a proportionate basis. An HNI investor may incur a loss if he uses funds from banks or non-banking financial institutions (NBFCs).

After the Bharati Shipyard IPO last December, all smaller issues have seen less number of applications from HNIs. In December 2004, when the Rs 82.50 crore offer of Bharati Shipyard for 1.25 crore shares was subscribed 72.17 times the issue size, the HNI category alone was subscribed 205.07 times over.

There were 4,610 applications in this category and proportionate allotment was made to 2,386 of these. Over 2,000 applicants recieved no allotments. Out of these, whoever had applied for loans for investing in the issue ended up making losses since they now had to pay the interest they had incurred on these loans.

But in subsequent IPOs that have hit the market, investors seem to have become wiser. Kamlesh Gandhi, executive director of Centrum Finance, says, Certainly, investors are taking a close call on the issue of IPO funding these days because the cost of acquiring shares in IPOs does not prove to be profitable when the issue gets subscribed many times over.

Atul Mehra, executive director and head of capital markets, JM Morgan Stanley, said, The size of the issue is relevant from the free float and overall trading perspective. But what we we advise our investors to look at while investing in any IPO is the quality of management, and the growth opportunities that the business and the company offer in the next three years.

This year, the HNI category has not witnessed such huge oversubscriptions so far.

While the Rs 91 crore offer of UTV Software Communications for 69.99 lakh shares was subscribed 26.35 times, the HNI category (17.50 lakh shares) was subscribed 35 times, and retail 38.6 times.