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The Perils of a Leveraged HNI In OverSubscribed IPOs


The much hyped and highly oversubscribed IPO “HUDCO”, was listed recently at a premium of 21%. We now know that most of the leveraged HNIs have lost money in this game of IPO financing.
IPOs are more hyped then they actually should be. Some IPOs like D-mart have given spectacular returns for the investors, while some others like ICICI Prudential have proven to be dud. But for an HNI, who leverage to to invest in IPO. It’s a far more riskier business than what it seems.
The Perils of a Leveraged HNI In OverSubscribed IPOs
Regulations have been tweaked by SEBI to benefit retail investors (who buy for less than Rs. 200,000) . IPOs try to give them at least one lot – so a heavily subscribed IPO will see just one lot per applicant.
But HNIs are allotted share on proportionate basis in an IPO. i.e if the issue is oversubscribed by 5 times in HNI category, then for every five shares you have bid, you will be allotted one share. If its under subscribed (below 100%), then you will be allotted the number of shares an investor has bid for.
And the cash is unblocked in your only five days after issue. And the listing takes place 15 days post issue. This is where the problem area lies.
If an issue is oversubscribed 10 times (in Non Institutional Investor category), then an HNI must apply for Rs 1 Crore Worth of shares, to get Rs 10 lakh worth of shares. And an HNI doesn’t necessarily hoard cash in account to the tune of Rs 1Cr. Brokers will then offer them a loan which means – you only put what you want to buy, we’ll give you the “multiple” as a temporary loan. For every Rs 1 Lakh an HNI invests, he gets a loan of  Rs 49 Lakh, to allow for an application of 50 lakh rupees.
So  if an investor is applying for an IPO which is oversubscribed by 10 times then,

  1. Investor invests Rs 2 lakh and rest Rs 98 Lakh is given as a loan by the broker. Assuming the interest rate is at 7% and HNIs usually invest on last day of IPO.
  2. The investor will be allotted Rs 10 lakh worth of shares. Out of which he has invested Rs 2 lakh and rest Rs 8 lakh is borrowed.
  3. So the un-allotted cash of Rs 90 lakh is redeemed after 5 days. the investor needs to pay interest of Rs 8,630 for five days at the rate of 7% per annum. (This is low – and tends to be – because of some cross financing arrangements)
  4. The IPO listing will happen after 15 days. The investor need to pay back on the listing day (though not mandatory). Thus he will be again paying interest for Rs 8 lakh for 15 days. it amounts to Rs 2302.
  5. So Net he will be paying an interest of Rs 10,932, even before the IPO gets listed. Which is almost 1.1% of his allotment.

So the IPO has to trade at least 1.1% higher on the listing day.
Case 1: If on Listing day stock trades 5% higher than issue price on the opening day.

  • Investor sell his allotment for Rs 10,50,000 and has generated a return of Rs 50,000.
  • Investor net profit will be 50,000 – 11,000 = 39,000
  • Thus his net return on Rs 2,00,000 is Rs 39,000, thus netting a profit of 19.5% on capital

Case 2: If on listing day Stock trades 5% below the issue price on opening day

  • Investor sells his allotment for Rs 9,50,000 and incurred a loss of Rs 50,000
  • Investor’s net loss will be Rs 50,000 + 11,000 = 61,000
  • Thus his net return on Rs 2,00,000 is Rs 61,000, thus incurring a loss of 30.5%

Note: While you might assume that you get bank interest (typically 4% on a saving’s bank account) such IPO financers usually take that interest for their own, which is why interest rates are low.

Its all Theory, Get into some real stuff

Now we will look into four recently subscribed IPOs viz. ICICI Prudential Life Insurance, D-Mart, S Chand and Hudco. Before we dwell into our analysis, we assume an HNI invests Rs 10 lakh in a IPO. The leverage is at 50x at the rate of 7% per annum. We are not calculating any opportunity cost for amount invested from investors pocket.

ICICI Prudential

ICICI Prudential which saw 28.55 times bidding in Non-institutional category, closed 10.96% down on the listing day.
The Perils of a Leveraged HNI In OverSubscribed IPOs
Leveraged HNIs were the ones who had been majorly hit. Leveraged HNI lost almost 24% on their investment.

The Perils of a Leveraged HNI In OverSubscribed IPOs D-Mart

D-Mart, the most trending IPO for 2017 has proved to be a boon for leverage:
The Perils of a Leveraged HNI In OverSubscribed IPOs
The Perils of a Leveraged HNI In OverSubscribed IPOs

S Chand

Though the stock almost listed flat, it bought a 18% loss on a leveraged HNIs shoulder
The Perils of a Leveraged HNI In OverSubscribed IPOs
The Perils of a Leveraged HNI In OverSubscribed IPOs


Hudco is a curious case to look into. Even though the stock got listed today at a premium of 21%. Still an leveraged HNI was incurring a loss of 10%.
The Perils of a Leveraged HNI In OverSubscribed IPOs
The Perils of a Leveraged HNI In OverSubscribed IPOs

When do leveraged HNIs become a roadkill?

The major reason HNIs incur huge losses is due to high over subscription. If we observe the general trend, most of the subscription of HNIs happen on Day 3 of IPO issue. Even if NSE/BSE updates the website on subscription stats every hour, it becomes increasingly difficult to track until the last hour. And the prospects of listing gains lures HNIs to invest even in an oversubscribed environment.
And how do HNIs find out the listing gains in the issue period? Its the grey market which provides with the premium on the IPO applications. But most of the investors doesnt even know where the grey market exists, but only rumors are heard of the premium and no one can exactly confirm the source. But this gives a rough or vague idea. But these grey market form a small part of the overall market. If we believe the theory ” Market knows more than us” then its better to take these grey market premiums with a pinch of salt.

Its a Make or Break Deal.

While the most of the odds are against a leveraged HNI, but lower subscription coupled with listing gains can bring in the much needed one year return on their portfolio. Look at the case of D-mart, though the stock gave investor listing premium of 100%, but still he was only able to make profit of 88%. It was the over subscription which brought down the profits.
So its a thumb rule for a HNI investor not to take extreme leverage in an oversubscribed market. Only brokers (who usually have IPO financing arms) make money from such IPOs. It’s not a good idea to blindly rush in, just because everyone else is.


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