Brokers, NBFCs offer margin funding to HNIs at 14-15%.
Stock brokers and non-banking finance companies (NBFCs) are riding piggyback on the huge investor interest for the public issue of Coal India Ltd, the largest domestic issue so far.
Financiers across the country are aggressively extending margin funding to high net worth individuals (HNIs) at 14-15 per cent annually, for a minimum of 15 days. This is nearly a percentage point higher than in the recent issues.
Margin funding allows investors to leverage, as they have to bring in only five to 10 per cent of the money. The rest is financed. Most brokers and NBFCs are funding only HNIs who intend to put in a subscription of not less than Rs 50 lakh. Some brokers are also accepting equity shares in place of margin money.
For Rs 50 lakh, an HNI can subscribe to 20,000 shares. The net issue size is 568.47 million shares and 15 per cent is reserved for HNIs.
“The exact cost per share for HNIs can be calculated only after the subscription figures are available. The cost per share for HNIs availing of margin funding will rise with subscription. Fewer shares will be allotted if the subscription is high,” said a Mumbai-based brokerage house.
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High subscription will be a major drawback for investors. This is because it will result in less individual allotment and they will have to still pay interest on all shares for which funding was availed. CIL is likely to be listed on November 4, a day before Diwali. The company will raise a little over Rs 15,000 crore. The price band has been set at Rs 225-245.
For retail investors, brokers are offering four per cent guaranteed return for every subscription on their behalf. Considering that retailers can apply for a maximum of Rs 1,00,000 worth of shares, they will get Rs 4,000 for every application made on the behalf of brokers.
Grey market premium
The rate of interest for margin funding is based on the hype generated by the grey market premium for the issue. The premium soared immediately after the price band was announced around 4.30 pm today. “The IPO is being traded at a Rs 19 premium to the upper end of the price band. This is a conservative estimate by brokers and investment bankers at which the IPO will list,” said a broker.
“The issue is attractively priced, which is why there will be huge demand for margin funding. The company is the largest coal producer globally and at the upper end of the price band, will be valued around Rs 1,50,000 crore. This is way below the fair value of the company, which could be close to 2,00,000 crore,” said Manish Sonthalia, vice-president and fund manager at Motilal Oswal Asset Management Company.
During the 2005-2007 bull run, NBFCs or arms of brokerage houses charged 18-25 per cent 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 the same day.
L&T Finance, Edelweiss Capital, Motilal Oswal, Kotak Securities, IL&FS and SMC Global are the big players in the margin funding business.