Borrowing from brokers to apply for IPO shares could backfire
The HNI category of Reliance Power as per reports was oversubscribed almost 160 times. And close to 75% of HNIs resorted to leveraging by getting bulk of IPO application money funded through borrowing.
By Prerna Katiyar & Muthukumar K, TNN |
Reliance Power shares has finally got listed. While no one expected sweeping gains from this counter, the 373-level, at which the scrip price ended, almost looks like a nightmare for the 42 lakh shareholders. But retail investors need not lose heart. This is because their losses have been muted, thanks to over subscription and investment cap of Rs 1 lakh.
For the uninitiated, for the Reliance Power IPO, retail investors were given the option of either making full payment at the point of applying or making part-payment of 25% and pay the rest after the allotment process is over. Additionally, retail investors were given a 5% discount, making the allotment price at Rs 430. And because of over subscription, investors who invested the maximum (that is Rs 1 lakh) were allotted only 17 shares ��� on the higher side.
This, at an offer price of Rs 430 for retail investors, translates to a total investment of only Rs 7,310. The stock price ended at Rs 373 on Monday, which effectively leads to a loss of around Rs 900, or 13% on an investment of Rs 7,000. A meagre amount, in actual terms, if the investor had adopted the ���sell-on-listing��� strategy.
For the uninitiated, for the Reliance Power IPO, retail investors were given the option of either making full payment at the point of applying or making part-payment of 25% and pay the rest after the allotment process is over. Additionally, retail investors were given a 5% discount, making the allotment price at Rs 430. And because of over subscription, investors who invested the maximum (that is Rs 1 lakh) were allotted only 17 shares ��� on the higher side.
This, at an offer price of Rs 430 for retail investors, translates to a total investment of only Rs 7,310. The stock price ended at Rs 373 on Monday, which effectively leads to a loss of around Rs 900, or 13% on an investment of Rs 7,000. A meagre amount, in actual terms, if the investor had adopted the ���sell-on-listing��� strategy.
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While retail investors may find solace from losing not much in actual terms, HNIs, who leveraged their positions, were hit hard. The HNI category of Reliance Power as per reports was oversubscribed almost 160 times. And close to 75% of HNIs resorted to leveraging by getting bulk of IPO application money funded through borrowing. These HNI players, who were purely looking for listing gains, were caught on the wrong foot. Many had no other option but to book losses and get out of the counter due to the obligation to payback their financier. With the stock ending at 372 on BSE, the losses incurred by leveraged players were phenomenal.
���Why single out Reliance Power, any leveraged player who is here to sell on listing day on leveraged position can face the same situation,��� says Reliance Money director & CEO Sudip Bandyopadhyay. ���Anyone who is here for serious investment should have medium- to long-term view and this stands true for retail and HNIs alike,��� he adds.
How HNIs lost the money ��� the number crunching
Let���s take the situation of an HNI who borrowed from a broker to fund his investments. Assume he applies for Rs 1 crore worth of Reliance Power shares, out of which he gets 90% funded through the broker. In this case, he would invest only Rs 10 lakh while the rest is funded by the broker. The going interest rate for such borrowing in the market is around 18% pa. And for the Reliance Power IPO, investors would need funding for 24 days ��� the difference between the IPO closing date and the date of listing.
HNI category was oversubscribed 160 times. So for Rs 1 crore of application amount, he would have effectively got around 138 shares at a share price of Rs 450. Now, there are two types of losses that needed to be factored. One, the listing loss and the other, in terms of the interest cost for borrowing.
A little number crunching shows that on the cost of investment, Rs 62,500 (138*450), this investor would have to book a loss of Rs 10,674 considering that share price closed 17.2% lower than the offer price. And since he leveraged his position, he would have to pay interest on Rs 90 lakh that was funded by the broker.
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This interest amount is Rs 1,06,521, which is nearly 10 times the loss he made on listing. ���Somewhere, this had to happen. If you are leveraging just for listing gains, you will be in big soup someday or the other and this can happen with any stock,��� adds Mr Bandyopadhyay. The lesson ��� leveraging could backfire and investor needs to be aware of that.
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