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Stocks

Borrowing to buy IPOs – Another Bubble in the making

LIvemint/Reuters: Brokers making costly loans to IPO speculators

Mumbai: Indian brokerages are borrowing ultra short-term money at almost twice the market rate, often from mutual funds, to lend to clients seeking shares in IPOs, fund managers said, in a sign of froth building in the market.

Brokerages have between them borrowed up to Rs100 billion ($2.1 billion) for IPO financing in the last few weeks, the fund managers said. None of the brokers would comment.

“They are lending the 15 days paper at 7-8% levels for IPO funding,” said K. Ramkumar, head of fixed income at fund manager Sundaram BNP Paribas. He declined to name the issuers.

Three-month commercial paper pays a coupon of about 4.5%.

The brokerages are issuing secured non-convertible debentures with a 15-day call option to fund houses and are lending the money to their rich clients at a minimum 11.5% and as much as 20%, the fund managers said.

Markets went up 3% today. They have been falling for a while – though the NHPC IPO got oversubscribed 23 times, that means nearly 120,000 cr. got applied; some of that money must have come from the secondary markets, which explains it dipping, and it looks like the borrowing at high rates to get even higher returns has started.

I’d written a post about it in Feb 2008 (Borrowing for IPOs are loser loans) which, come to think of it, was just about when the markets had tanked; IPO loans were very popular then. If history is a guide, this is a sign of bad things to come.