Is applying by leveraging worth it? 

In the current IPO season the first issue to receive overwhelming support was NHPC. The issue was oversubscribed an overall 23.74 times. The individual break up was as follows

Overall  23.74 times total applications received 12, 84,390. 

For purposes of this calculation certain assumptions have been used. Rate of interest is taken as 10%, period of loan as 13 days and margin is assumed as 5% which looking at the response was reduced to 3% subsequently. The HNI category was for 16, 35, 43,966 shares. At the price which has been fixed for the issue at Rs 36, the total amount to be raised in the HNI category was Rs 588.76 crs. The amount actually raised with the issue being oversubscribed 56.56 times was Rs 33,300 crs.  

Taking our assumptions it means HNI’s as a group paid 5% margin of Rs 1665 crs and borrowed Rs 31,635 crs to invest in the issue. They paid a sum of Rs 112.67 crs as interest to acquire shares with a market value of Rs 588.76 crs or Rs 6.89 per share.

A retail applicant applying for maximum shares would invest Rs 94500 for an application of Rs 2625 shares and would be allotted 678 shares as per the figures based on subscription. Assuming this quantity of allotment, a HNI would have to make an application for 38347 shares investing Rs 13, 80,492. The allotment to both would be a similar 678 shares. The margin payable on this amount would be Rs 69,025 and the loan amount would be Rs13, 11,467. The total interest that would be paid by the applicant is Rs 4671 or Rs 6.89 per share. The leveraging done by the HNI investor is 19 times.

In March 2008 we all will remember that one of the reasons why markets fell was because of the leveraging position in the F&O segment. The average margins in NIFTY is about 20% which means a leveraging of about 5 times and in stock futures was around 33% which means leveraging of 3 times. If 3 and 5 times could become dangerous at that time what would 20 times do to the market. I am not considering the fact that margins were than reduced to 3 % which meant a leveraging of almost 33 times.

What this kind of leveraging does is that a) it increases the cost to the investor and b) creates additional selling pressure on the stock when it lists. In the case of NHPC with an interest cost of about Rs 7, the benchmark for the share listing becoming successful or not is not the issue price of Rs 36, but the HNI investor cost of Rs 43. Before the issue opened for subscription one heard of a premium of Rs 12-14, which reduced to Rs 10, then to Rs 7 and currently indications are of between Rs 4-5. What listing day has in store one is not sure? Probable listing date is 31st August or 1st September.