Mumbai: The income-tax (I-T) department’s investigation wing is probing the cash flow and source of funds of some high networth individuals (HNIs), who had generously bid for shares in some of the high-profile initial public offerings (IPOs) that hit the market early this year.
A senior official of the I-T department, who asked not to be named, confirmed the government is inquiring into the source of funds of a few HNIs.
HNI, a term widely used in the private banking and private wealth management space, typically refers to individuals with more than $1 million (Rs4.2 crore) worth of investible assets.
“We have found that certain high networth individuals had applied for huge amount of shares in some IPOs this year, but did not have that kind of cash flow,” said the same I-T official. “We are investigating the source of money of these individuals,” he said. However, he refused to disclose the findings of the investigation.
Unwanted attention: The income-tax department has looked at actor Abhishek Bachchan’s application for shares in Reliance Power’s IPO. Photograph: Manav Manglani / Reuters
This official cited Bollywood actor Abhishek Bachchan as an example, noting it was based on the actor’s application for shares of Reliance Power Ltd’s IPO under the HNI category. Bachchan is supposed to have applied for shares worth close to Rs1,000 crore.
Mint could not independently confirm this. Multiple attempts over one week to elicit a response from Bachchan were unsuccessful. It is also unclear how many shares Bachchan got or still owns, and the I-T department asking for information is not in itself an indication of any wrongdoing. Meanwhile, the same I-T official said that Bachchan’s advance tax filing for fiscal 2008 was about Rs1.75 crore.
Some of the HNIs who are being looked at have client equity brokerage accounts with publicly-traded domestic brokerages Indiabulls Securities Ltd and Edelweiss Capital Ltd, added the same official.
Gagan Banga, chief executive of Indiabulls Financial Services Ltd, the non-banking finance company (NBFC) of Indiabulls, said: “In February, the income-tax department had asked for a list of our HNI clients and the amount invested by them in the Reliance Power IPO and we sent the list to the department. But the I-T department is not probing Indiabulls in any such matter.”
According to Banga, Indiabulls is only a financier and the department wanted to know what collateral was kept against certain fundings in the Reliance Power IPO. The onus to prove cash flows is on the clients, not the brokerage, Banga noted.
A person familiar with the matter said Indiabulls had allowed Bachchan to leverage around Rs300 crore, while the actor invested some Rs14 crore of his money, to place bids for the Reliance Power shares. However, this financing was completely in compliance with Reserve Bank of India (RBI) regulations on lending to clients, the same person said.
A spokesperson for Edelweiss Capital denied there was any request from the I-T department regarding the investments made by its clients.
The department is also looking at some of the HNIs who have invested in realtor Kolte Patil Developers Ltd’s IPO, am-ong others, said this official.
Indiabulls Financial Services and ECL Finance Ltd, the NBFC subsidiary of Edelweiss Capital, are among the country’s largest.
Under market regulator Securities and Exchange Board of India’s (Sebi) IPO allotment norms, 15% of an issue is reserved for HNIs, 35% for retail individual investors and 50% shares are allocated to qualified institutional buyers (QIBs), which are the institutional investors. Mutual funds (MFs) have 5% reserved within the QIB category, which also includes foreign institutional investors and insurance funds, among others.
Reliance Power’s Rs11,700 crore IPO, India’s biggest till date, had fixed the price band for the issue at Rs405- 450 per share. To enable large participation by retail investors, it had offered a discount of Rs20 per share, or about 5% of the issue price, to retail investors. The issue saw a mad rush by investors and was subscribed more than 70 times.
According to investment bankers and analysts, lending HNIs money to bid for shares in IPOs is one of the most lucrative business for NBFCs. Apart from high interest rates — typically, upwards of 18% — NBFCs, in most IPOs, also get a share of the interest income generated by banks that typically deploy investor money in the overnight call money market, say several investment bankers, who didn’t want to be identified. Call money is an overnight inter-bank market from where banks borrow in the short term to tide over any temporary asset-liability mismatches.
One leading banker explained it using the Reliance Power IPO as an illustration. The size of the HNI portion in the IPO was about Rs1,030 crore against some Rs6,200 crore for QIBs and Rs1,050 crore for retail investors. While the QIB portion, excluding MFs, was subscribed some 86 times, the MF segment was subscribed about 27.5 times and the retail portion 13.5 times. The HNI portion was subscribed some 180 times.
Now, QIBs had to pay only 10% upfront, while HNIs and retail investors had the option to pay Rs115 on the application, that is, about 25% of the issue price. Going by the price of Rs115, which was paid upfront, HNIs’ bids for the Reliance Power IPO were worth some Rs21,700 crore. Taking the overnight call money rate at 7% per annum, the minimum income that banks could have generated from Rs21,700 crore, for 15 days, is an astounding Rs62 crore.
However, Banga of Indiabulls said the float shares does not happen any more between banks and other parties, since such transactions came under RBI’s scrutiny in 2006.
But some other brokers said that such transactions do happen between banks, NBFCs, brokers and even HNI investors, though it may not be accounted in a file named “float money-sharing”.
But to counter this, Sebi had proposed that investors money not leave their bank accounts unless shares are allocated.