MUMBAI: Brokerages are raising money through issuance of non-convertible debentures (NCD) to fund retail and high net worth investors for subscribing to IPOs by Reliance Power and the Future group, among a few others.
A debt fund manager with a leading asset management company said, “Financing subscription to IPOs is definitely happening. Brokerage firms have devised a foolproof mechanism to raise funds. Such firms then lend the funds to high net worth individuals (HNI), who wish to apply for the Reliance Power IPO. However, there are several investors who intend booking profits on the day of listing.”
The market is flooded with NCD issues by players such as DSP Merrill Lynch, Kotak Securities and India Infoline. Sources said banks have a stipulated limit on the exposure they can have towards the capital markets. This has forced some brokerage firms to turn to mutual funds for fund-raising.
Mutual funds are the largest subscribers to the NCDs as they pocket distinctly higher that what they normally earn by investing in commercial paper or certificates of deposit. Certain mutual fund houses have sold off some short-dated assets for raising funds to invest in the NCDs.
AMCs investing in commercial paper or certificates of deposit pocket a yield of 7.5-8%. On the other hand, NCDs issued by the brokerage firms offer a yield of 11-14%. This implies a clear arbitrage of at least 350 basis points for just a fortnight, informed market sources.
Fund managers said the volume of such lending has risen manifold for several AMCs, in certain cases by as much as 100%. Market sources estimate that even as the Reliance Power issue has a size of Rs 10,000 crore, it is likely to attract inflows of Rs 25,000-30,000 crore.
An official from an AMC said: “Earning an arbitrage of over 350 bps, that too for investing in papers with a rating similar to alternatives like CPs and CDs is proving to be lucrative. The only issue here is the demand for cash is unprecedented and MFs do not have the capacity to lend such huge amounts. The only option for them is to liquidate a part of their short-dated assets to generate the much-needed liquidity.”
Coming to the risks involved, the official added, “We are only risking an exposure to huge brokerage firms that have a good credit rating, even though we are aware of the end-use of the funds. We are assured that once the allotment process is through, the funds would find their way back to us.”
Further, fund managers at AMCs point out the pipeline for IPOs and other public offers is full from February to mid-March. “The last fortnight of March is a period of stringent cash conditions, by when we intend getting back our funds. We would then look at new offers only from April,” they say.
A debt fund manager with a leading asset management company said, “Financing subscription to IPOs is definitely happening. Brokerage firms have devised a foolproof mechanism to raise funds. Such firms then lend the funds to high net worth individuals (HNI), who wish to apply for the Reliance Power IPO. However, there are several investors who intend booking profits on the day of listing.”
The market is flooded with NCD issues by players such as DSP Merrill Lynch, Kotak Securities and India Infoline. Sources said banks have a stipulated limit on the exposure they can have towards the capital markets. This has forced some brokerage firms to turn to mutual funds for fund-raising.
Mutual funds are the largest subscribers to the NCDs as they pocket distinctly higher that what they normally earn by investing in commercial paper or certificates of deposit. Certain mutual fund houses have sold off some short-dated assets for raising funds to invest in the NCDs.
AMCs investing in commercial paper or certificates of deposit pocket a yield of 7.5-8%. On the other hand, NCDs issued by the brokerage firms offer a yield of 11-14%. This implies a clear arbitrage of at least 350 basis points for just a fortnight, informed market sources.
Fund managers said the volume of such lending has risen manifold for several AMCs, in certain cases by as much as 100%. Market sources estimate that even as the Reliance Power issue has a size of Rs 10,000 crore, it is likely to attract inflows of Rs 25,000-30,000 crore.
An official from an AMC said: “Earning an arbitrage of over 350 bps, that too for investing in papers with a rating similar to alternatives like CPs and CDs is proving to be lucrative. The only issue here is the demand for cash is unprecedented and MFs do not have the capacity to lend such huge amounts. The only option for them is to liquidate a part of their short-dated assets to generate the much-needed liquidity.”
Coming to the risks involved, the official added, “We are only risking an exposure to huge brokerage firms that have a good credit rating, even though we are aware of the end-use of the funds. We are assured that once the allotment process is through, the funds would find their way back to us.”
Further, fund managers at AMCs point out the pipeline for IPOs and other public offers is full from February to mid-March. “The last fortnight of March is a period of stringent cash conditions, by when we intend getting back our funds. We would then look at new offers only from April,” they say.
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