Brokers taking costly loans for IPO investors

Demand from investors for relatively costly funds to invest in IPOs demonstrates an increase in risk appetite and craving for higher returns

Mumbai: The country’s brokerages are borrowing ultra short-term money at almost twice the market rate, often from mutual funds, to lend to clients seeking shares in initial public offerings, or IPOs, fund managers said, in a sign of froth building in the market.

Demand from investors for relatively costly funds to invest in IPOs demonstrates an increase in risk appetite and craving for higher returns as one-year bank deposit rates have been slashed to roughly 6.5% from about 10% last year.

It also shows individual investors expect to see a strong market performance by newly listed firms, as they would need big early returns in order to repay loans carrying interest rates of as much as 20%.

“I think this is the beginning of such risk-prone behaviour from investors. It will only increase until there is one listing debacle,” said Arun Kejriwal, director at research firm KRIS.

Brokerages have between them borrowed up to Rs10,000 crore for IPO financing in the last few weeks, the fund managers said. None of the brokers would comment.

“They are lending the 15 days paper at 7-8% levels for IPO funding,” said K. Ramkumar, head of fixed income at fund manager Sundaram BNP Paribas. He declined to name the issuers. Three-month commercial paper pays a coupon of about 4.5%.

The brokerages are issuing secured non-convertible debentures with a 15-day call option to fund houses and are lending the money to their rich clients at a minimum 11.5% and as much as 20%, the fund managers said.

When rates were broadly higher early last year, brokerages were charging about 13.5% to applicants for shares in the IPO by Reliance Power Ltd, which has never traded above its listing price.

Individuals are turning to expensive loans from brokers because banks can take longer to process applications and can be less willing to lend large amounts.

Indian IPOs are making a comeback after an 18 month gap, helped by a rally of as much as 87% in the benchmark index from its March low.

Narayanan Somasundaram contributed to this story.