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November 25, 2006

Indians Borrow to Buy IPOs

posted by MR WAVETHEORY at 11/25/2006 06:41:00 AM

The Telegraph reports that IPO frenzy has hit India. Indians are borrowing money from banks to buy IPOs.

At present, 50 per cent in an IPO is earmarked for qualified institutional investors (QIBs) and 35 per cent for retail investors while 15 per cent is reserved for HNIs.

Investors in the HNI category are the ones who heavily rely on bank funds to subscribe to IPOs. Capital market circles say though retail investors also resort to bank funding, the scale is limited. “Most of the leveraging is done by investors who fall in the 15 per cent category. Therefore, the impact of the RBI draft norms may be felt only in that category. Overall, they will not hurt new issues,” says Prithvi Haldea of Prime Database.

This sounds alot like the dot com IPO feeding frenzy.

“The people who normally go for bank financing could be executives, traders, doctors, lawyers or even brokers,” an analyst said. He added such IPO finance is usually available at an interest rate of 15 per cent. Haldea says such investors account for 5 to 6 per cent within the HNI section.

15% is quite a high rate. The returns have got to be a lot higher to justify this type of borrowing.

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