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Grey market demand for DLF IPO suggests a soft landing

Grey market demand for DLF IPO suggests a soft landing
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First Published: Fri, May 25 2007. 10 49 AM IST
Updated: Sun, May 27 2007. 04 15 PM IST
Ahmedabad/Mumbai: If the grey market activities are any indication, Delhi-based developer DLF Ltd’s initial public offer (IPO), the largest domestic stock offer, is in for a soft landing.
On Thursday, DLF announced a price band of Rs500-550 for IPO of 175 million shares, which will hit the market on 11 June and close on 14 June.
At this price band, the issue could garner between Rs8,750 crore and Rs9,650 crore.
In the grey market for IPOs in Ahmedabad, the stock has been trading at a premium of Rs20-40 on the eventual issue price over the last few days. On Thursday, after the price band was announced, the premium on the issue price remained unchanged in the grey market.
The grey market for IPOs, known as koshtak, usually involves one person promising to buy a stock, which is to be listed, at a pre-decided premium on the issue price from someone who has applied for the shares. The premium is promised on the expectation that once listed, the stock would trade higher than the issue price and premium.
While the dabba trade, which is what the grey market trade in listed securities is called, is well known, koshtak has also been around since the 1970s.
The koshtak market has diminished in big cities but remains buoyant in smaller cities that are dominated by retail investors, such as Ahmedabad, Indore and Rajkot, and applications routed through it could eventually account for 5-8% of the total equity offered, some stock brokers say.
“The grey market helps retail investors discover the price,” says an Ahmedabad-based stock broker who is active in the grey market and didn’t want his name used. “It is difficult for most of the investors to go through the prospectus or understand the technicalities of the area of operations of the company. The price arrived through koshtak acts as an indicator for him. The higher the premium in the grey market, the more the chances of retail investors rushing to subscribe to the issue.”
Blogs on many Indian stock-related websites often carry the grey market prices.
The grey market trade in the DLF issue started early this week. The current premium of around 6% on the issue price is relatively low compared with that of, say, Sobha Developers Ltd, another real estate company, which commanded an 18% premium for its IPO in November 2006, when investors couldn’t get enough of Indian real-estate companies.
This week, Decolite Ceramics Ltd, a vitrified tiles company with an ongoing public offering, is trading at a premium of Rs7 in the grey market, on a price band of Rs45-54. In contrast, a much sought after offering such as the Reliance Petroleum Ltd IPO last year commanded over 50% premium in this market.
“As of now, there is not too much demand for this issue... in normal course, activity in this market heats up a week before the listing. So we need to wait and watch,” says a Mumbai-based investor who plays in the grey market and didn’t want to be identified.
DLF first moved the capital market regulator with its plan for an IPO in May 2006 when real-estate prices were at a peak. After failing to get the regulator’s clearance, the listing now comes when the real-estate market has been deflated by repeated interest rate hikes and other curbs that have been put in place to address fears of a real-estate bubble forming.
DLF’s price band is within a tight range of the minimum price of Rs500 mandated by the stock market regulator for shares with a face value of less than Rs10. DLF’s shares have a face value of Rs2.
DLF, as per the IPO documents filed with the market regulator in April, based on which the offer was cleared, said it hoped to use the proceeds towards acquisition of land and developmental rights (Rs6,500 crore) and development and construction cost for existing projects (Rs3,493.30 crore).
In addition, DLF said it would pay off loans of what it receives in excess of Rs10,000 crore from the IPO.
The offer would constitute 10.27% of the fully diluted post-issue capital of the company, which has filed its red herring prospectus with the Registrar of Companies for its forthcoming initial public offer, a company statement said.
“The way IPOs are done, it’s all pre-marketed even before the book building process is initiated,’’ said Prithvi Haldea, managing director of Prime Database.
“With half the issue size subscribed by Qualified Institutional Buyers (QIBs), the current price band reflects the price validated by key QIBs who would be participating in the issue.”
Haldea, whose company has tracked the primary market for the last 16 years, said retail participation usually follows the response from institutions and high net-worth individuals. “The QIB participation is important and the price band reflects their willingness to pay for the issue”, he said.
More than 90% of IPOs issued this year has seen retail portion being oversubscribed, according to Prime Database.
DLF has Kotak Mahindra Capital Co. Ltd and DSP Merrill Lynch Ltd as the global coordinators and book running lead managers.
(John Samuel Raja D. in Chennai and Shabana Hussain in New Delhi contributed to this story.)
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First Published: Fri, May 25 2007. 10 49 AM IST
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