In a bid to service the IPO-financing market, which is likely to see a big uptick with the Coal India (CIL) issue, NBFC arms of brokerages are rushing to borrow money via commercial paper (CP). Between them, NBFC arms of brokerages, including Edelweiss, Religare and JM Financial, are understood to have picked up close to Rs 3,000 crore.
Indeed, interest rates have shot up in the short-term money market to around 8.5-9%. So much so that some players fear there could be a shortage of liquidity. Religare Securities CEO Gagan Randev said, ?Earlier, I would have expected to be able to lend to investors for the CIL issue at between 11-13% per annum. But now the rate could be higher since the cost of borrowing has gone up from 6.5 to 9%.? Indeed, Randev believes that the quantum of money lent by NBFCs together, could turn out to be less than earlier expected. High net worth individuals(HNIs), Randev says would be willing to leverage at interest rates of 13% because even if the issue lists at 10-12% premium, the cost of borrowing for eight days would be worth it.
Typically, HNIs borrow anywhere between Rs 5 lakh and Rs 5 crore and the borrowing cost varies depending on the quantum borrowed.
In the past month, several IPOs have listed at handsome premiums, encouraging small investors to once again punt in the markets. The forthcoming IPO of CIL is expected to see a fair amount of money being lent to HNIs since 15% of approximately 569 million shares is reserved for them. At the upper end of the band of Rs 245, the amount needed for the quota to be fully subscribed is just under Rs 2100 crore. Since the issue is expected to be oversubscribed, investors may want to apply for a larger quantity of shares. The demand for IPO financing depends on the valuation and quality of the issues and Coal India is believed to be one of the least risky issuances. ?HNIs are only interested in issues that leave something on the table for them, and if they are sure to get sizeable returns after paying the interest,? said Prasanth Prabhakaran, president?retail broking, IIFL.
With Sebi announcing new norms for the Asba facility, more retail invetsors may use the facility this time around. Asba is a facility that ensures investors? funds leave the bank account only after the shares are allocated and, therefore, the money earns interest for that duration.