New rules to dent fund flow into IPOs

The new rules to curb inflows through Participatory Notes (P-notes) is likely to act as a dampener for the initial public offering (IPO) market as most of the recently concluded big issues, including the $2 billion-plus DLF issue, saw huge subscriptions by overseas investors through P-notes.

Bankers, however, added that serious long-term money will continue to come through the FII route, and the new rules will discourage short-term leveraged funds from placing bids through the P-note route. "Quality issues will now get quality money," said a banker.

CRACKING THE SHOTS

Bankers said serious long-term money will continue to come through the FII route, and the new rules will discourage short-term leveraged funds from placing bids through the P-note route

On an average, 20-30 per cent of the demand for the IPO subscription comes through P-notes

On an average, 20-30 per cent of the demand for the IPO subscription comes through P-notes. It is estimated that there are about 12-13 P-note investors who bid heavily in IPOs. The Sebi, at its board meeting on Thursday, approved all the proposals to curb P-notes in total.

Several big ticket IPOs are lined up in coming weeks, and this include the mega initial share offering by Anil Ambani-backed Reliance Power, real estate firm Emaar MGF, Mundra Port & SEZ, among others.

"In the initial period, the demand will fall short by 20 per cent assuming that it comes from P-notes. Several hedge funds in the US come through this route as they will have a problem in placing the bids directly. We feel that smaller issues are likely to be more impacted as a lot of small funds come through P-notes," said a senior executive with a leading local investment bank.

Another banker said that the impact would vary from issue to issue. "Small issues will see a decline of at least 10 per cent as in the recent past many small issues were subscribed many times over due to big bids in FII category through P-notes. However, as long as the fundamental story of the company is good, there will be a good number of overseas investors who would like to place the bids through P-notes."

P-notes accounted for as much as 25 per cent of the bids received under the foreign institutional investors' (FIIs) category in the Delhi-based DLF's IPO. Bids through P-notes were as high as 40 per cent for the ICICI Bank's Rs 10,062 crore follow-on public offer.

Around 13 issues have received the Sebi approval (as on 19.10.07) including Mundra port & SEZ which plans to raise about Rs 1500 crore, the IPO is likely to hit the market on the first week of the next month.