HNIs give large IPOs a miss, bet on smaller issues

Mumbai: High net worth individuals, who borrow and invest in initial public offerings, have preferred smaller issues so far this year as several large share sales have failed to generate enough returns.

Out of the 17 IPOs with over Rs 2,000 crore in size so far in 2021, only two - Nykaa and Zomato - have seen sizeable bids from HNIs. In contrast, these investors put in bids in the range of Rs 20,000 crore to Rs 77,000 crore for 20 IPOs below the size of Rs 2,000 crore.

Bankers said it's easier for HNIs to get funding in smaller issues, which have made better listing gains than their larger peers. Several non-banking finance companies lend to these investors at the time of the issue. Investors return the money on the listing day.

"It's almost like an assured deal in the smaller public issues where the grey market premiums are often high, and there are good arbitrage opportunities compared to the financing cost," said Ravi Sardana, an investment banker. "As most of the HNIs invest just for listing day gain, the returns in large-size IPOs are not that great compared to the smaller size IPOs."

Some of the recent smaller IPOs have seen record HNI subscriptions. For instance, the non-institutional investors or HNIs portion of the Rs 600-crore IPO of Latent View Analytics was subscribed a record 851 times last month. The HNI category got bids worth Rs 77,000 crore. Similarly, the HNI category of the Rs 619-crore IPO of Tega Industries was subscribed 666 times, translating into bids worth ₹62,000 crore.

Finance companies said they mostly lend for only those IPOs which have the potential of record subscriptions. Higher the subscription of an IPO, better are the chances of making money on the listing day, said bankers.

"HNIs invest in smaller IPOs because the oversubscription numbers in them lead to a frenzy and create a huge demand in the grey market and subsequent premium," said Arun Kejriwal, founder, Kris Advisory Services. "Also, in the smaller IPOs, their margin is just 1% while the NBFCs will fund the rest."

The HNI portion of the Rs 171-crore IPO of Paras Defence and Space Technologies was subscribed 928 times.

Even in smaller IPOs such as Tatva Chintan, Nazara Technologies, Easy Trip Planners, and Rolex Rings, the HNIs portion subscribed 360 to 512 times.

HNI investments in large IPOs such as Star Health and Allied Insurance, Paytm, Chemplast Sanmar, Nuvoco Vistas and IRFC, among others, were modest compared to the smaller issues. For instance, the HNI portions of the Rs 7,249-crore IPO of Star Health and Paytm’s Rs 18,300-crore issue remained undersubscribed.

A lot of the HNI frenzy in the IPO market is set to moderate from April next year.

The Reserve Bank of India said NBFCs cannot lend more than Rs 1 crore to investors seeking to buy stocks in IPOs from the next financial year.