Mumbai: It might not be the best perquisite to highlight on a day when the Indian stock markets fell, but large and rapid returns from initial public offerings (IPOs) have encouraged some companies to offer interest-free (or low-interest) loans to their employees to invest in these as part of a larger human resource strategy of keeping attrition low and motivation levels high.
Keynote Capitals Ltd, a domestic brokerage, had earlier set the trend by offering loans to its employees at 2% interest for investing in the IPOs of NTPC Ltd and Maruti Udyog Ltd (now known as Maruti Suzuki India Ltd). That was back in 2003 for the Maruti Udyog and 2004 for the NTPC issues.
This time around Keynote, Concept Public Relations India Pvt. Ltd (Concept PR) and a few other firms extended interest-free loans to employees to subscribe to the IPO of Reliance Power Ltd, that closed on Thursday.
“It is good incentive scheme and it will save our employees a lot of money by way of interest costs,” said Concept PR’s managing director Vivek Suchanti. The agency is an active player in marketing of IPOs but is not involved in the Reliance Power IPO.
“We floated a scheme for about 600 employees across India, and offered them advance money to invest in the Reliance Power IPO. About 415 of them took up the offer,” Suchanti added. The company chose this IPO because “it looked like a sure shot way for people to make some money” and is large enough for everybody to get some shares allocated, he said.
Reliance Power offered a 5% discount to retail investors for whom 30% of the 260 million shares on offer have been reserved.
It has also given retail investors an option of paying about 25% of the money at the time of subscribing to the issue. A retail investor can invest up to Rs1 lakh in an IPO but for the Reliance Power issue, one needs to put in Rs25,875 with an application. Since Concept PR has offered Rs25,000 to each of its employees, they would only need to invest Rs875 of their own to subscribe to the IPO.
With 415 employees opting for the scheme, the total outgo from the firm is a little over Rs1 crore. The Reliance Power IPO has a price band of Rs405-Rs450. This means, if a retail investor applies at the higher end of the price band, she can apply for about 225 shares. Since the retail portion of the issue has been subscribed nine times over, an investor is likely to get an allotment of about 25 shares. This means, out of Rs25,875, over Rs15,000 will be refuned after the shares are allotted.
Going by the arrangement, Concept PR employees will return the money to the company on the day Reliance Power shares get listed even if they decide to hold on to them. Most stocks list at a huge premium. In the past one year, 14 IPOs offered 75% or more returns on the listing day to the investors. The list includes Edelweiss Capital Ltd, Mundra Port and Special Economic Zone Ltd, Religare Enterprises Ltd and Vishal Retail Ltd.
“We are contemplating continuing the scheme for large IPOs that are set to hit the market,” Suchanti said.
In 2007, 106 IPOs raised Rs48,329 crore from the market. Investment bankers expect at least Rs75,000 crore to be raised from the market through public issues, including IPOs, in 2008.
Suraj Sarongi, a director with Keynote Capitals, said his company offered Rs25,000 to 150 employees and that 70 of them opted for it.
Keynote employees have an option to either pay back the money at listing of shares or have the amount deducted from their salaries in instalments over a period of six to 12 months.