Brokers go all-out to woo IPO investors

Stock brokers are providing incentives to the retail investors to subscribe to Reliance Power's (RPL) initial public offer (IPO) on their behalf. For every application where shares are allotted, brokers will pay Rs 7,000 to the retail investor. The amount would be paid over and above the cost of shares allotted.

The deal, sources say, is that the retail investor, subscribing on broker's behalf, would have to make an application for 225 shares, the entire cost of which "� considering the discount of Rs 20 a share that RPL has offered "� would come to Rs 96,750.

Since the investor is entitled to make only 25 per cent payment while subscribing to the RPL issue, under the part-payment scheme, he would have to invest only Rs 24,187.50 for subscribing to 225 shares. Therefore, the retail investor would stand to gain nearly 29 per cent returns on his investment of Rs 24,187.50 even if he is allotted the minimum number of shares, which is a lot of 15 shares.

But, what has induced stock brokers to extend such an incentive to retail investors? According to one school of thought, apart from creating a strong demand for the IPO, brokers stand to make handsome profits without making any investments.

Consider this: estimates by stock brokers, determined by the grey market premium of Rs 500 a share, indicate that RPL stock would list above Rs 950 against the issue price (upper band) of Rs 450 on the bourses.

Further, calculations also suggest that if the retail portion (68 million shares) of the issue is subscribed by 30 times, one out of every three investors would be allotted at least 15 shares of RPL, which is the minimum allotment quantity. In the given circumstances, the brokers would have at least 15 shares to sell in the market, if allotment is made to the retail investor applying on their behalf.

Therefore, the cost per share for the broker, even after paying Rs 7,000 over and above Rs 430 a share, could come to Rs 896.67 a share.

An individual broker would thus stand to make Rs 750 (at Rs 50 a share) on every successful allotment made to the application, if he manages to sell the share at over Rs 950 on the listing day.

Moreover, the broker does not make any investment to earn this profit as the payment to the retail investor would be made only on the next day of listing.Sources said that each sub-broker has been instructed to collect such applications in lots of 25 to 30.

Similarly, stock brokers are estimating the high networth individual (HNI) quota, consisting of 2.28 crore shares on offer, to be over subscribed between 150 and 200 times.