Riding on the primary market wave, NBFCs such as Bajaj Finance, Aditya Birla Finance, Motilal Oswal, IIFL Wealth, Infina Finance, JM Financial and Edelweiss among others have been funding high net worth individuals through short-term lending, sometimes for just five-seven days.
From Burger King to Happiest Minds, Gland Pharma to Route Mobile or even last week’s Indigo Paints, well-heeled investors are jumping at the opportunity to rake it in within a short span. That debut bump is leading to artificial asset inflation and price distortions, according to some market participants.
The risk is a tepid debut, such as SBI Cards, which saw a listing discount of 13% over the issue price.
“IPO funding is creating an unhealthy market and distorting the price of IPOs on listing day as most of the subscribers through funding will sell on the first day itself,” said Arun Kejriwal of KRIS Research and Advisory.
Typically, to fund clients, NBFCs raise short-term money through commercial paper at 4-5% and then lend at 6.5-8%. In the last six months, the top 10 finance firms have raised nearly Rs 1.8 lakh crore through commercial paper in the primary market with a tenure of 7-10 days for IPO funding, apart from self-funding and other sources of funds.
“It’s a win-win for all,” said an executive with a leading NBFC. Funds are raised with a yield to maturity between 3.2% and 6.25% per annum. “The HNIs make money from the listing premium, and the gains in the recent issuances have been mind boggling. If the pricing is good, there is no looking back.”
A Mumbai-based analyst with a leading foreign institutional investor sounded a warning.
“What if there is a Black Swan event between financing and the listing day? Who buys these CPs–mainly mutual funds. Remember what happened during IL&FS?” he said. “Additionally, where is the actual price discovery in the listing when the demand generated is largely artificial.”
NBFCs have loaned about Rs 40,000 crore to high net worth individuals (HNIs) for the Mrs Bector Foods and Gland Pharma IPOs, according to estimates from shadow bank executives and traders. For instance, a south Mumbai businessman got a call from his wealth manager about the Burger King IPO, a runaway success with more than 300 times oversubscription. The NBFC that managed part of his investment portfolio was happy to offer a loan of Rs 49 crore at 7.5% if he put up only Rs 50 lakh.
About Rs 35,200 crore was raised for the Mrs Bector Food IPO while around Rs 26,000 crore was raised for the Burger King IPO, according to data on ICRA-rated commercial paper. The amount raised for Chemcon Speciality Chemicals and Computer Age Management Services was more than Rs 37,000 crore. Similarly, about Rs 24,700 crore was raised for Happiest Minds Technologies. To be sure, these figures are just for CPs rated by ICRA.
“We have seen buoyant demand for IPO financing of late, which can be attributed to bullish market conditions, quality of companies coming out with IPOs and expected listing premium by investors,” said Shankar Vailaya, CEO, Sharekhan BNP Paribas Financial Services.
NBFCs cater to demand that’s unmet by banks.
“The IPO financing market is very vibrant in 2020, supported by an increase in HNI investors’ interest in IPOs in the quest for listing gains, with average demand between Rs 40,000 crore to Rs 50,000 crore per IPO,” said Shalibhadra Shah, Group CFO, Motilal Oswal Financial Services. “With banks not active in this segment due to regulatory restrictions, the field is dominated by NBFC arms in the capital markets and wealth management businesses.”
The HNI portion in Mrs Bector’s Food was subscribed by 621 times, generating demand worth Rs 50,645 crore. The cost of funding in Mrs Bectors Food was in the region of Rs 212-217 per share. The issue which was priced at Rs 288, listed at Rs 501 and ended on the first day at Rs 595, for gains in excess of Rs 300. Even if one were to consider the weighted average, the gains were in the region of Rs 285-290. (SEE CHART)
Financiers insist the risk is limited since there is a margin for the lender in terms of shares. Normally, higher the funding cost, lower the chances of making money on the IPO after all costs are factored in. Investors need to pay interest on the entire amount borrowed and not on the amount actually allotted. That is why higher oversubscription works against borrowers as they have to have more interest on idle funds.