NBFCs owned by brokerages do brisk business after recent listing gains.
At a time brokerage income is dwindling and margins for distribution of third-party products are next to nothing, non-banking financial companies (NBFCs) are providing the much-needed relief to brokers. The significant listing gains posted by recent initial public offers (IPOs) have prompted investors to borrow margin money from NBFCs.
Most large- and mid-sized brokerages have NBFCs that are primarily into IPO financing for retail as well as high net worth individuals (HNIs). As there is a limit on the margin a brokerage can directly provide its clients, investors are rushing to NBFCs.
| RISING INTEREST | |
| Company | QIB subscription (times) |
| Gujarat Pipavav Port | 86 |
| SKS Microfinance | 18 |
| Bajaj Corp | 50 |
| Prakash Steelage | 10 |
| Midfield Industries | 48 |
| Technofab Industries | 48 |
| Source: PRIME Database | |
Market players, while acknowledging that NBFC financing is gaining steady ground, say competition is tight and margins wafer-thin. “The last two-three issues saw the revival of the NBFC business,” said Girish Dev, chief executive, Networth Stock Broking, adding, “SKS Microfinance and Gujarat Pipavav Ports are prime examples. The mega issue of Coal India is also expected to see a lot of activity in the NBFC space. There is some confidence among retail investors. But we have to wait and watch to see how the trend pans out over a longer term. The rates, however, have become quite competitive.”
Nandip Vaidya, president (retail broking), India Infoline, said IPO financing was a function of “market conditions and the perception about the issue price”.
“There are a fair number of investors keen on funding IPOs. If the issue is perceived to be well-priced, there is a higher tendency to leverage,” added Vaidya.
Most market entities active in the NBFC space are not quite forthcoming on the rates charged from high net worth individuals and retail investors. But it is widely believed that the rates are lower than those at the height of the bull run in 2007.
“The average rate of interest for HNIs is 11-12 per cent, while that for retail investors is 14-16 per cent,” said the head of a domestic brokerage which has an NBFC. “This is less than in 2007, when the minimum rate for HNIs was 14 per cent while that for retail investors was around 17 per cent. The interest rate is also a factor of the relationship a client has with the brokerage. If he is a regular trader with us, the rate will be a bit lower,” he said.
The revival of the IPO financing business is also evident from the huge subscription numbers of the recent IPOs, especially in the HNI segment. In case of Gujarat Pipavav Ports, the HNI segment was subscribed a massive 86 times. SKS Microfinance’s HNI segment was subscribed more than 18 times. Similarly, Prakash Steelage was subscribed nearly 10 times in the HNI portion. Bajaj Corp, which opened for subscription in early August, saw the HNI portion subscribed nearly 50 times (see table).
In IPO financing, an NBFC lends a major chunk of the application money to the investor at a fixed rate of interest. After listing, the investor sells the shares and repays the money along with the interest cost. The investor profits only if listing gains are higher than his cost of funds. Hence, this activity picks up when a definite trend of stocks listing at a sizeable premium is visible. Typically, NBFCs lends around 80 per cent of the application money.
