PN Clampdown Fails To Clip IPO Premiums Soar

MUMBAI: If the prophets of doom were to be believed, the SEBI clampdown on participatory notes was expected to impact demand for initial public offers (IPOs). But the prevailing rates of upcoming IPOs in the grey market give no such indication.

According to brokers active in the grey market, most issues that are open for subscription or are scheduled for listing in the coming weeks, are trading at a premium as high as 100% to the issue price. IPO premiums have been steadily rising even when the regulator was in the process of finalising PN guidelines.

Merchant banking circles say that a significant portion of FII subscription in IPOs have been coming in through the PN route. “The trend shows around 25% of FII demand for IPOs is met through P-notes, which is expected to come down after the Sebi move. While this will largely impact small issues, companies with good business model and bright prospects would not see much of an impact,” said a merchant banker.

Tighter PN regulations could affect short-term fund flows into both the primary and secondary markets, feel market observers. However, there is near unanimity in market circles that the flows will pick up over the next few months if the growth in the economy as well as corporate earnings sustain.

Issues like Mudra Port and SEZ, Religare Enterprises, Allied Computers and Varun Industries are trading at a huge premium to their offer price, including the much talked about Reliance Power IPO, according to grey market sources. The coming months may witness a slew of IPOs by infrastructure, energy and power companies.

Grey market participants are expected to take cue from the outcome of the Fed meeting and it would have significant impact on the premium of these IPOs. Sources say there has been some decrease in the premium of Barak Valley Cement and Religare Enterprise in the last session.

For example, in the case of Barak Valley Cement, premium has gone down from Rs 24 to Rs 18-20 in just one day. Also in the case of Religare Enterprise, it has gone down from over Rs 300 to Rs 260-280 range. Though they maintain that the positive news from the US could further fuel positive sentiments in the primary market and premiums may rise substantially.

In a volatile or a weak market, grey-market premium shrinks and many a time the issue becomes unattractive for subscription. In such a situation, the pricing is usually conservative so that there is some scope for investors to make gains on listing. The issuers and lead managers of the forthcoming IPOs are expected to have adopted this strategy as P-note issues could have dented their prospects severely, say bankers.

Investors are understood to have been offered higher rates for lending their applications in many of the latest issues. A retail investor can apply for a maximum of Rs 1 lakh worth of shares. So, he is usually paid Rs 2,500 to Rs 3,000 in cash for his application.

This amount has gone up to Rs 5,000 to 6,000 per application in some cases due to high grey-market premiums. Often, the application money of Rs 1 lakh is provided by financiers who are part of the grey market network. The applicant investors are only bothered with the cash they get per application, in fact, they have no control once the shares enter their demat accounts.

If there are three or four eligible applicants in a household, it means an income of Rs 15,000 to 20,000 for the family just renting out the demat and bank accounts. Such income can rise further when the primary market is quite bullish. As part of grey market operations, an IPO applicant hands over the delivery instruction slip book of the demat account signed by him/her to the agent broker. Once the allotment is made, the broker gets the shares transferred to his account, say market sources.