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ICICI IPO Oversubscribed; Dollar may drop; Buy yourself some portfolio insurance


ICICI Bank’s mega issue is fully subscribed on its opening day. According to NSE’s web site here are the stats (19/6/07):

  • Institutions have already oversubscribed their part of the issue, by over 5.47 times. Both domestic and foreign institutions have bid for massive amounts of shares.
  • Corporates and HNIs have nearly oversubscribed their bit. Of 1.4 cr. shares reserved for them, they’ve already bid for 1.36 cr. shares. Most of this has come from corporates.
  • Retail and Existing shareholders have applied for less than 1% of their reserved quota. There are three more days and I expect this part of the issue to get more interest by the last day.

Overall this has huge implications – firstly, that there is a heck of a lot of money in the markets – it just absorbed two issues worth Rs. 18,000 cr. without so much as a sneeze.

Secondly, a large part of the bidding has come from FIIs, which I guess will eventually mean about 10,000 cr. coming into the markets just from DLF and ICICI’s local issue. Add about 10,000 cr. for ICICI’s U.S. issue, Sterlite’s $2 billion means another 8,000 cr. About 28,000 cr. just in these three companies, and there are more IPOs, regular investment etc.

What does that mean for the dollar/rupee? The RBI has allocated about 110,000 cr. for the “Market Stabilisation Scheme”, money taken against bonds and used to buy dollars and pay rupees instead. This is to counter inflation (if they didn’t give bonds they would have to print more rupees, which adds to inflation). Now as of the latest annual report the RBI has already allocated 78,000 cr. They can’t mop up this money and stay within limits for the rest of the year, and they won’t print more rupees because of inflationary concerns. So in all likelihood the rupee will rise. That means exporters – IT sector, Pharma and many others – will see a pullback.

Lastly, with so much money going to IPOs, will FIIs pull back on market investments? A good part of money flow comes from FII money and the lack of it is going to affect prices, and negatively so.

Add to this the concerns on high interest rates. The next quarter’s results are going to be out starting the first week of July; and they will perhaps show the trend. But all this is temporary – the dollar will stabilise at some point, the interest rates will turn back and the juggernaut of our economy will move on. There may be one or two quarters of slowing growth, but that should not be a huge problem for you – think of the amount of time left for your retirement!

Now if you think you want to protect yourself against a temporary blip, why not buy “insurance” instead? Let’s say the stock market could fall 10% but you want to cover yourself at 5-6% instead. Buy put options on the nifty for 4000 (the Nifty is at 4200 today) of the 26 July expiry date. Each option is worth Rs. 64 right now, so you will have covered yourself for a Nifty below 3936. You can buy Nifty options only in piles of 50 each (a “contract”), so you will pay Rs. 3200 (plus commissions, depends on your broker) per contract. How many contracts should you buy? Buy enough to cover your portfolio – each contract covers around 2 lakhs (4000×50) so if you have a portfolio of 10 lakhs you should not buy more than 5 contracts. (You can buy less to get less insurance)

But insurance comes at a cost – nearly 1.6% of your portfolio has to be paid to cover the cost of the put. Plus, the put deteriorates in value for every day that the Nifty stays above 4000. And if it expires useless (i.e. Nifty at 26 July is above 4000), you’ve lost Rs. 3200 per contract. Still, this is a useful thing if you think the market will lose its sheen temporarily.

The other thing you can do is to sell futures – sell the July future contract at 4200, and if it goes down, you are covered. Yet, the futures contract involves higher margin money for each contract: about Rs. 20,000. Also, if the Nifty rises, you must pay out the difference between your purchase price and the price at expiry; if the Nifty reaches 4300, you’ll pay out Rs. 100 per share (x50 = Rs. 5000 per contract).

Finally, of course, you can also sell out your shares and sit in cash. Not advisable for a) transaction costs and b) taxes that may apply. Still, it’s better than buying insurance, because the best insurance is cash.


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