Readers will recall the over whelming response received by NHPC when they went public and the disappointment of investors post listing. The HNI category was oversubscribed 57 times and those applying with leveraged funds had an interest cost of about Rs 7. The net effect of this was the lukewarm response that the next PSU offering namely Oil India received from the retail investor.

With a pipeline of roughly 60 issues and over 60000 crs to be raised the retail participation is a must for the success of the issues. Retail investors were offered a discount when the follow on issues of ONGC, IPCL, Dredging Corporation and other issues were made in 2003. The recent changes announced by Sebi earlier this week where the concept of “French Auction” have been introduced would allow the issuer or seller of shares make up the loss or part of the loss suffered on the retail discount.

The shares listed at Rs 1019 and Rs 1096 on the BSE and NSE respectively. The highs made were 1156 and 1156.70 respectively. The setting for listing day was what one could dream of. Markets were buoyant with the BSESENSEX gaining a staggering 273 points or 1.63% to close at 17126.84. The NSENIFTY gained 77.10 points or 1.54% to close at 5083.95. The previous day saw big brother ONGC put in a strong performance and gained Rs 32.35 or 2.79% to close at Rs 1189.65. A perfect setting for listing and OIL delivered. The stock closed at Rs 1140.55 and Rs 1135 on the BSE and NSE respectively.

From the data given above it is clear that there has been a high delivery percentage on day one. Close to 37% of the shares traded were delivered. What is even more important is the fact that almost 40% of the 2.64 cr shares issued in the IPO have been delivered on day one. Very clearly these shares bought have not been by weak hands but by institutional investors. The most surprising thing that has happened is that the difference or gap between OIL and ONGC is now about Rs 26 or about 2.22%. The general consensus at the time of the IPO was that there should be a discount of about 10% between the price of ONGC and OIL as they had similar valuations and ONGC was ten times the size of OIL. The reason for the poor response was the belief was the overpricing. The next few days alone will clear the confusion on whether people perception was correct or incorrect.

In conclusion OIL India Limited won the day for investors on day one.

There will be 3.91 allottees for every Rs one lakh of equity. Firm allotment has been made to those retail participants who applied for 180 shares. There will be a total of 15,844 shareholders in the retail category. The HNI category would have 88 shareholders .The total issue was oversubscribed 2.017 times.

The issue is expected to list on Tuesday the 22nd of September 2009 on the BSE and the NSE.

The HNI category with the employee under subscription added was oversubscribed 54.75 times. Taking the highest retail allotment of 713 shares, the similar allotment in the HNI category was for an applicant who applied for 39025 shares. The oversubscription in this category was 54.75 times. The cost of application for an investor who took a loan in the HNI category at 10% with a margin of 5% for a period of 13 days is Rs 6.67 per share. This interest cost has reduced as the allocation increased on some cancellations or withdrawals and also because of addition of shares to the category on account of employee under subscription. 

The issue is to be listed on Monday or Tuesday and would be finalised in a day or two. 

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.