about 12 months ago
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Yes, the IPO market is booming and it looks like every issue is getting listed as super-duper premiums. But beware – like the secondary market when the heat gets too much, cooling off happens and in the IPO market, its time to be cautious, discretionary, especially if your aim is to only make listing gains.

The warning word to pay attention to “HNIs” or Non-institutional Investors (NIIs). Historically, we have seen that the moment HNIs start going all-out, leading to massive oversubscriptions and grey markets become a bevy of activity, you know that its time to pause.

Route Mobile had a smashing listing; it got listed on 21st Sept on the BSE at Rs.708 v/s IPO price of Rs.350, premium of over 100%! The IPO had received an overwhelming response - was subscribed 74.36 times, with HNIs taking the lions share at 195.61 times, institutional at 91.06 times and retail investors at 12.85 times.

But prior to that Happiest Minds probably broke all records – it got listed at Rs.351 v/s IPO price of Rs.166. The IPO was subscribed 151 times with strong response, once again led by HNIs at 351 times, institutional at 77 times and Retail by 71 times.

Today, two new listings happened – Chemcon and CAMs. Chemcon Specialty Chemicals got listed at Rs.730.90 v/s IPO price of Rs.340. Same thing here too - IPO was subscribed 140 times, with HNIs picking up the biggest chunk, subscribing over 450 times, followed by institutional investors at 113 times. Retail too was extremely robust at 40.4 times.

And Computer Age Management Services (CAMS) got listed at Rs.1230 v/s IPO price of Rs.1518. It was subscribed almost 47 times, HNIs portion getting subscribed 111.85 times, institutional investors by 73.18 times and retail was relatively subdued at 5.44 times.

The common factor in all – huge over subscription on the back of HNIs. So, why do the HNIs do what they do? Simply because they have huge gains while we are left wondering what happened. HNIs, as we have seen previously too, never need to bring in the entire bidding amount themselves; they take a loan which explains why they wait till the last day to invest. The interest they pay is calculated on a per day basis so makes sense to go for the last day. They stay put for 7 to 10 days.

HNIs bank on these stocks on two things – high subscription of the IPO, preferably over 100 times and then a bumper listing. And to ensure both, what we learn is that the HNIs pump up the grey market by bidding much much more in the IPO than what is reserved for them. This is done deliberately; has nothing to do with the fundamentals of the IPO. This helps push up the total subscription of the IPO, which in turn, pushes up the premium on the grey market, making others think that the issue is having a fantastic response, luring in the truly gullible ones.  

Chemcon, which got listed at over 100% premium was as such quoted at a 107% premium on the grey market on Friday. Mazgaon Docks, which closes today, is also showing an over 90% premium over the upper price range of IPO at Rs.145.

As one fund manager explained – in Route Mobile IPO, an HNI who had borrowed at 7% interest rate for 7 days, with the issue getting subscribed 192.81 times at the upper price band of Rs.350, his cost per share for borrowing is – 350 x 192.81 x 7/100 (interest rate for 7 days) x 7/365 (no.of days) = 90.59. This means their total cost per share was Rs.440.59. And it got listed at Rs.708; and even if we add the grey market premium, they made a windfall gain and continue to make money as the price climbs over Rs.800.

So, what does the retail investor do? Most would have to suffice with a very small allocation; one can sell and accumulate the listing gains and re-enter the stock for long term once all this HNI-induced euphoria dies down.

With listing now happening in 6 days from the earlier 12 days after issue closing, listing gains has indeed become the norm. In the long run, its always and always the fundamentals alone that will matter.

PS: Someone asked a very pertinent question, “If these are HNIs why are they borrowing money to invest in the IPOs?”

Well, their category is HNIs because they invest in huge quantity, much more than retail investor but lesser then institutional investors.

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