A loan to participate in public issues

The primary market (or the market for initial public issues "" IPOs) is set to boom. In the next two months, at least six big initial offerings including Indrapastha Gas, TV Today Aaj Tak, Patni Computers, Bank of Maharashtra and Dena Bank are expected to hit the road for funds.

This has resulted in increasing demand for funds from investors.

Vivek Seth, country head (capital market), at Birla Global Finance, said, "Investors going through margin finance get an additional consulting window or independent agency to give an frank advice on the offer. Also, the new disclosure norms by the Securities and Exchange Board of India (Sebi) has helped the investors judge an IPO better," he added.

Birla Global Finance also offers funding to investors interested in initial public offerings. In addition, it makes sense for investors to go through the funding route as it helps them get the required allotment.

It is also a known fact that the higher your application amount, the greater is the possibility of more shares being allotted to you.

Several non-banking finance companies and banks have started gearing up to finance investors. The big players in funding initial offerings including Birla Global Finance, IL&FS Investsmart, Bank of Punjab, IDBI Bank and the Kotak Mahindra group.

However, most financiers restrict the funding to 5-10 per cent of the total issue collection.

HOW FUNDING WORKS Before grabbing that loan offer, the investor needs to assess whether borrowing for the initial public offer would yield him positive returns and if so, to what extent. Such borrowing requires the investors to appreciate the variables involved and make an informed decision.

Says Vivek Seth, "Repayment capacity of the investor is the key factor in determining the approval of loan."

The margin would be based on the basis of the RBI norms for non-banking finance company or bank's take on the over subscription.

The minimum margin is 40 per cent of the application amount. Most banks have an overall restriction on the amount of loan.

This is Rs 10 lakh per applicant for physical shares and Rs 20 lakh per applicant for demat shares. The interest cost levied by these non-banking finance companies and banks for these funding ranges from 15 per cent to and 18 per cent.

Of course, a lot depends upon then interest rates prevailing in the market.

Apart from interest cost, investors have to also pay expenses for dematerialisation, processing fees, stamp duty etc. Besides these costs, one will also have to incur dematerialisation charges and brokerage charges while selling the shares allotted.

Investors should also bear in mind that they will have to pay interest to the company or bank for the entire loan amount.

In other words, if a public issue were oversubscribed by 10 times and an investor who has applied for 1,000 shares gets 100 shares, his gain on listing pricing will be for just 100 shares.

However, he would have to bear the cost burden of interest on the for 1,000 shares. "In times to come, initial public funding may be packaged more attractively and be made easily available," Vivek Seth adds.

Investors also need to keep in mind is that he will sell the shares allotted at the earliest on listing.

In case an investor wants to hold on due to appreciation possibilities in the future, he will have to arrange for funds to repay the loan with interest and incidental charges, provided you have a borrower or a notional cost for own funds needs to be taken into consideration.

WHEN DO YOU GAIN The level of premium upon listing "" over the issue price "" will determine the gains on the investment. Of course, the net gain on listing would include interest cost, processing fees, brokerage fees etc.

If the listing price is equal to or below the issue price, in such case the investor will have to wait for appreciation. Meanwhile, the interest cost on the loan will keep increasing.

To simplify things let's take the Maruti Udyog's offer, which had a floor price of Rs 115, while book was closed at Rs 125 per share.

The issue price to the investor (applying for 1,000 shares but being allotted 350 shares) having taken a loan at 18 per cent per annum, would need the opening listing price to be higher by about 24 per cent over the issue price of Rs 125.

That is, the issue to be listed at Rs 130 to break even. However, issue actually opened at Rs 158, thus yielding an excellent gain over cost of funds to the investor.

CAVEAT

Investment is planned action and hence needs a consultant for advice is suggested. Financing is an act of future discounting which needs calculations, while the stock market is the meter of the country's economic health. Therefore, investors have to look at all factors before taking the foot forward.