IPO – Investor Profit Offering

Yeah yeah, you saw it correct. IPO is now Investor Profit Offering, instead of Initial Public Offering. Lucky investors who got allotment in the recently launched IPOs have minted recorded profits. Companies irrespective of their size, profits, track record and sustainability, were able to list themselves on the bourses at mind boggling valuations. You can understand the euphoria from the fact that Chemplast Sanmar, which was delisted nearly a decade ago from the stock exchanges at ₹15, has now hit the market with an IPO price of ₹540.

However, have you ever wondered, where the money is coming from? Obviously, retail investors are putting a lot of money in these IPOs. But, they alone can’t lift such heavy weight primary market offerings. This requires funds from institutions and HNIs. Mostly, HNIs looking for return, are backing these IPOs. Nonetheless, given the size and quantity of offerings and the quantum of oversubscriptions, it is highly unlikely that the HNIs only pumped their own money. They used leverage to invest in the IPOs and take profit from the premium listings. So, where did they get leverage from?

NBFCs! HNIs have taken short term loans from NBFCs, for the purpose of investing in IPOs. To cater to this sudden large ticket lending demand, NBFCs have raised whooping ₹2.17 lakh crores, since June. NBFCs have raised this money via issuance of Commercial Papers (CP). CPs are ultra short term debt instruments having maturity of up to 8 days. Hence, they are perfect debt instruments to raise finance for investing in IPOs. Further, given surplus liquidity in the banking system, NBFCs were able to raise these funds at low interest rates; that were almost 40 basis points lower than the normal. Whereas, leverage seeking HNIs paid handsome interest rates to these NBFCs for funds. Hence, the IPO market bought lot of cheer to the NBFCs. Bajaj Finance, Aditya Birla Finance, Tata Capital Financial Services, Kotak Mahindra Investment, IIFL Finance and Edelweiss Investments are the names of few NBFCs who have raised large some of money via CP, since June. This has already transformed into decent price action of some of the NBFCs. As per data, there was more than 500 times return (intra day) on options prices of few of this stocks!

NBFCs are expected to raise more money via CPs, as there exists strong pipeline of IPOs in the coming months. Hence, the cycle may continue. At the end we can say that, the blockbuster IPOs make everyone rich (Promoter, Investor, Employees, Exchanges, Merchant Banks, Investment Banks, Underwriters, Commercial Banks, NBFCs, etc…).

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