Funding investors to apply for initial public offers has reached a crescendo with just a week to go for the Reliance Power IPO, the largest ever so far.
Sources involved with IPO marketing say that almost every brokerage and finance company has come out with loan schemes, including a few private sector banks.
Loans are being offered for a period of 16 days at interest rates ranging from 14-19 per cent. "There are a lot of schemes targeting the high net worth individuals (HNI) especially and the demand from that category is quite high," said a broker.
Retails investors by definition can apply for upto Rs 1 lakh and 30 per cent of the issue is reserved for them, while 10 per cent of the issue is reserved for non-institutional bidders, which includes HNIs, and the rest is available for qualified institutional bidders.
"The number of IPO applicants has grown substantially from the last year. However, it will be difficult to put a number to it as the demand varies from issue to issue. The rate of interest charged is around 15 per cent, which may be higher in case of big issues," said Gagan Banga, CEO of Indiabulls Financial Services. But it is not all the issues that financiers are comfortable financing, say market participants and weak and small issues are not financed.
"There is so much competition to fund this time as financiers feel a Reliance issue is safer," he said.
"We are not encouraging our clients to go for a loan to apply for shares as we deem it would be an expensive exercise," said a financial advisor.
The issue is expected to be heavily oversubscribed, in which case the number of shares an investor would get will be minimal thereby increasing the cost of funding.
The funding scheme works like this: out of the amount payable on application Rs 105, the margin an investor needs to bring is Rs 10 and the rest would be funded by the financier.
At an approximate interest cost of 80 paise per share, the ultimate cost would work out to be Rs 80 per share in case the issue is oversubscribed 100 times.
"The cost of financing would be high as the issue is expected to be heavily oversubscribed and that is also one reason why the unofficial premium for the issue is high — around Rs 400 per share," said a member of the Bombay Stock Exchange.