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Margin funding revives on the back of IPO market action

By Palak Shah
August 06, 2009 02:39 IST
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The revival of the initial public offer market has prompted brokerages to re-start margin funding, a process by which they finance high net worth clients to subscribe to new issues.

The trend, which began during the Mahindra Holidays and Adani Power offers over the past two months, is now gaining momentum. Sources said big brokerage houses were aggressively extending margin funding to high net worth individuals (HNIs) for the IPO of state-owned power utility National Hydroelectric Power Corporation in August. The current interest rate of 12-13 per cent annually for 14 days is about four percentage points lower than the rate a year ago.

Margin funding enables an individual to buy stocks even if he cannot put up the entire amount of money. All big brokerage houses use this tool to fund their clients.

L&T Finance, the finance arm of engineering major Larsen and Toubro, Edelweiss Capital, Kotak Securities and SMC Global are among the big players in the margin funding business.

"The margin funding for Adani Power was about Rs 200 crore, but it is likely that funds for the NHPC IPO could go up to Rs 1,000 crore," said Rashesh Shah, chairman and managing director of Mumbai-based Edelweiss Capital.

During the 2005-2007 bull run, the non-banking finance companies or arms of brokerage houses charged interest rates of 18 to 25 per cent to subscribe for IPOs, which were quoting at extremely high premiums in the grey market. The business suffered badly after the disappointing listing of Reliance Power. With a grey market premium of over Rs 400, the stock listed at Rs 530 but closed at Rs 372 on the same day.

The margin funding process for the NHPC IPO requires the investor to bring in an initial deposit of 5 per cent; the rest will be provided by the NBFC. Brokers said they were funding only those clients who invest a minimum of Rs 1 crore.

NHPC is offering 1.63 billion shares, out of which 163.54 million shares are reserved for non-institutional investors or HNIs. According to broker estimates, HNIs are likely to get at least a 10 per cent allotment if the IPO is subscribed 25 times. If the subscription is subscribed 50 times, HNIs would get an allotment of 2.9 per cent. While the price band of scrip is between Rs 30 and 36, the grey market premium for NHPC IPO is Rs 13. In the grey market, sources said, trades worth Rs 50 crore have already taken place for the NHPC IPO. Traders expect this amount to go up to nearly Rs 500 crore by the time the issue opens for subscription on August 7. 

"After a long gap of over one year there is a demand for margin funding in IPO as the company is a public sector undertaking (PSU) and the price band looks fair," said Atul Gupta, director of Religare Finvest, which is involved in margin funding.

Religare was expecting a margin funding demand of nearly Rs 500 crore if markets are stable.

"The success of the IPO could boost margin funding for other PSUs, which are soon likely to tap the markets," Gupta added.  Market players said some brokerages were also offering funding to qualified institutional buyers with deal sizes of between Rs 50 crore and Rs 100 crore.

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Palak Shah
Source: source

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