A PSU financier, a Tata company, a pen maker and an oil refiner all walked into the primary markets the previous week and had investors in a frenzy. So much so that the four initial public offerings (IPOs) collectively garnered Rs 2,50,000 crore, arguably the highest mop-up in a week in primary markets.
While that only reaffirms their "buying power", investors are also boldly leveraging to size up their applications and amplify possible gains on listing.
According to industry estimates, over 62,000 applications, or 25 percent of large HNI (high networth individual) bidders, were backed by leverage. This works out to Rs 6,200 crore out of the Rs 2.5 lakh crore worth of bids garnered by the four big mainboard IPOs —Flair Writing Industries, Gandhar Oil Refinery, Tata Technologies and Indian Renewable Energy Development Agency.
Of all the investor categories, HNIs are usually the ones to place maximum leveraged bets; for retail investors, since the application size is only Rs 2 lakh, it does not attract too many creditors, said experts.
"Among non institutional investors, there are two categories as per SEBI's regulation — big and small. The smaller ones bid between Rs 2 and 10 lakh. The bigger ones that have to put bids above Rs 10 lakh use leverage frequently. About 25 percent of that category's subscription could be backed by leverage. Rest of the oversubscription is on back of flush of liquidity with investors," Ajay Garg, managing director, Equirus Capital.
Another industry source corroborated the estimate. Ever since SEBI discontinued proportionate allotment in HNI category, most investors now do not bid much higher than Rs 10 lakh. "So, the average application size for big NII can be considered Rs 10 lakh," the source said.
Earlier, HNIs used to put in huge bids and corner shares in the allotment process. SEBI changed the rule of proportionate allotment and converted it to lottery basis in case of oversubscription, from April 2022 onwards.
Tata Tech and IREDA saw bulk of leverage-backed financing, with Bajaj Finance and JM Financial leading the financiers' pack. Bajaj Finance financed close to 10,000 HNI applications for the two issues while JM Financial financed about 9,000, the source added.
The interest rates on these loans can vary between 13 and 24 percent, depending on the IPO and the client. The rates might look steep but the absolute figures are small, as the loan tenure is only three-six days now with listing timelines cut down by the market regulator.
That said, Vikas Khattar, co-head of Investment Banking and Head of ECM at Ambit Capital, told Moneycontrol that the quantum of IPO financing has come down in recent years with the Reserve Bank of India imposing a loan ceiling of Rs 1 crore on the amount that NBFCs can lend per borrower per issue.
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