Mumbai: A plan by India’s capital markets regulator to reduce the time it takes to list stocks after an initial public offering (IPO), from 21 days to seven days, will deal a significant blow to bankers to the share sales who enjoy the so-called float money on which they do not pay any interest.
Typically, the time between an investor putting in money for investing in an IPO and getting a refund after the shares are allotted, is three weeks and the bankers to the issue enjoy this money free for that period. Most IPOs are subscribed many times over and the banks have enjoyed this huge free float.
According to Delhi-based primary market data provider Prime Database, a set of domestic and foreign banks active in this space could have gained at least Rs2,300 crore in 2007-08 from this float. In 2006-07, banks made Rs630 crore from this business.
A Mint analysis of IPO subscription data, provided by Prime Database, shows that 76 IPOs last year collected more than Rs6.3 trillion from retail investors, high net worth individuals (HNIs) and qualified institutional investors (QIBs) and the money was kept with banks for 14-35 days.
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Assuming that the bankers who managed these IPOs deployed the money in the overnight call money market where the average return is around 6%, these banks made Rs2,316 crore. The overnight call market is an inter-bank market where cash-starved banks borrow to tide over their temporary asset-liability mismatches. The banks could have made substantially more money by deploying the float in other assets such as short-term treasury bills.
Typically, 50% of an IPO is reserved for QIBs (banks and other financial firms) and 25% each for retail investors and HNIs. The institutional investors pay only 10% upfront and the rest after getting the allotment of shares but retail and HNIs are, in most cases, required to pay the full amount.
Sensex, Bombay Stock Exchange’s benchmark index, rose about 45% over the past two years and investors rushed to greet almost all IPOs with open arms. As a result of this, some IPOs witnessed record subscriptions. For instance, the Rs11,700 crore IPO of Reliance Power Ltd was subscribed 73 times in January 2008. In 2007, Vishal Retail Ltd’s Rs110 crore issue was subscribed 69 times and the Rs491 crore IPO of Future Capital Holdings Ltd, an arm of Kishore Biyani’s Future Group, oversubscribed 133 times in January 2008.
In 2006, 93 issues—both IPOs and follow-on offers— raised Rs24,768 crore and in 2007, 105 issues raised Rs39,387 crore. This year, until now, 21 issues have raised Rs17,383 crore. With the Sensex losing around 22% this year, the primary market is not in the best of health but investment bankers say things can change. Many new issues are waiting in the wings for the market to stabilize before launching their IPOs.
In a conference in Mumbai, Vallabh Bhansali, chairman of Enam group, an investment bank, predicted a “bumper year for IPOs in 2009”.
Typically, bankers to the issue do not charge any processing fee from the company but they more than make up for that because of the free float. “Now we may have to charge a processing fee,” said a senior executive of a private bank which has been a banker to the issue for many IPOs.
He admitted that one source of free money will die once the Securities and Exchange Board of India (Sebi) implements this proposal. However, many others will remain. For instance, banks also enjoy float money when they distribute dividends of companies as there is a gap between the time when the money comes into their coffers and goes out to investors.
According to the Sebi proposal, investors’ money will not leave their accounts till they receive shares sold through a public issue. The banks will create a system of “locking” the money when an investor applies for an IPO and “unlocking” it after the shares are allotted. In other words, money will leave the investor’s account only after the shares are allotted.
This will virutally make the role of the bankers to the issue redundant. And, banks in which investors have accounts will enjoy the free float if they are not required to pay any interest for that period. However, it is not yet clear whether banks will pay interest to their depositors for the period when their money is “locked”.
Certain businesses “thrived on the inefficiency of the system,” said Prithvi Haldea, chief executive of Prime Database and a member of a panel appointed by Sebi to identify primary market reforms.
Among domestic banks, HDFC Bank Ltd, ICICI Bank Ltd, Kotak Mahindra Bank Ltd and Axis Bank Ltd are the prominent players in the IPO market. Some foreign banks operating in India, such as Citibank, ABN Amro Bank NV, HSBC and Standard Chartered Bank are also prominent in this business.
Most such banks have strong merchant banking business, including equity capital market operations.
According to a senior investment banker with a foreign brokerage who does not wish to be named, “Indian IPO services business has a group of banks with strong merchant banking units, who share the profits made from parking the investor money with issuers, instead of charging service fee.”
But the head of IPO services at a domestic bank said this isn’t the case and pointed to some domestic merchant banks, which are not owned by banks, that are active players in the IPO circuit.
Apart from the reduction in the process time of an IPO, Sebi could also overhaul the current system, cutting down data entry, which is presently done by syndicate members, bankers and the registrar separately. This will hit the IPO registry firms who charge a fee for the data entry work. Currently, the IPO registry business in India is dominated by a handful of firms.
According to Manoj Vaish, CEO of Dun and Bradstreet Information Services India Pvt. Ltd, there is strong need to “control (the) hype of oversubscription,” in IPOs.
One of the steps considered by Sebi is to make QIBs pay fully for the number of shares they apply for in an IPO.