IPO financing market to see healthy investment

Mumbai: The IPO financing market in India is expected to continue to witness healthy traction in the current fiscal, supported by favourable capital markets coupled with a line-up of prominent IPOs in a diverse range of industries including financial services and insurance.

According to Icra, the IPO financing market is pegged at an average Rs 17,500-Rs 22,500 crore per issuance, which can go up to Rs 65,000 to Rs 70,000 crore for large size issuances and issuances with higher investor interest.

Buoyed by favourable capital market outlook and healthy performance by some of the earlier issuances, there has been a surge in high net-worth individual investor (HNI) interest in IPOs to capitalise on the listing gains.

The rating agency noted that the median subscription level for the non-institutional investor (NII, which include the HNI investor) category stood at 80 times for the IPOs in FY17, as against 2 times for FY16.

This, in-turn, has created a market for providing short-term capital to the HNI investors for funding the IPO application.

In such instances, the HNIs deploy a small fraction of their own capital upfront, that is the margin money, and the rest is raised through short term loans covering the period between the IPO closure and the final listing, thereby allowing the HNI investors to apply for a larger quantum while applying for the IPO.

The interest cost on the IPO financing availed is a fixed expense for the investor, and final returns to the investors on listing of the scrip would need to be adjusted for this interest cost.

An analysis of the issuances during the period April 2016 to June 2017 shows that out of the total of 31 issuances, 24 issuances were listed at a premium, with median listing gains of 14 per cent. However, after factoring in the interest expense, the HNI investors would have made positive returns in only 11 issuances.

“The IPO financing market was very vibrant in FY17, supported by an increase in HNI investors’ interest in IPOs in a quest for listing gains. With banks not active in this segment due to regulatory restrictions, the field is dominated by non banking financial company arms of some of the leading players in the capital markets and wealth management businesses,” said Karthik Srinivasan, senior VP and group head - financial sector ratings, Icra.