SBI Card IPO: Does it make sense for HNIs to break the bank?

The IPO of SBI Cards and Payment Services, the subsidiary of country's largest lender State Bank of India, will remain open for subscription till March 5.

Qualified institutional buyers can put in bids till March 4. The price band for public issue is Rs 750-755 per share.

Let's look at the break up of investors who apply for IPOs.

Any investor who is applying for shares worth up to Rs 2 lakh is considered as a retail investor, and the bid for more than Rs 2 lakh worth shares is considered as HNI investor as per the SEBI guidelines. HNI is also called as non-institutional investor.

While retail and qualified institutional buyers usually put in bids with their own funding, majority non-institutional investors prefer to borrow funds to apply for public issues.

So, where do HNIs get the funds from?

Many of the NBFCs or their subsidiaries provide funds to these HNIs. Generally, the intermediator role is played by brokerages which arrange funds through their group companies or do a tie-up with other NBFCs.

"HNIs always have set a portion reserved and allotments are done in a proportionate basis in case of oversubscription in IPO. Thus, for this, an HNI investor has to pay an upfront payment or processing charges (varies), margin (based on expected oversubscription of the issue) and interest cost (around 10-13 percent per annum on IPO funding)," said Rudra Shares.

For example, an HNI needs Rs 1 crore loan for investing in an IPO and issue is expected to be oversubscribed 10 times. So, the HNI needs to pay 10 percent margin. Hence, the loan amount would be 90 percent of Rs 1 crore or Rs 90 lakh.

Now, on this Rs 90 lakh loan, an interest of 10 percent per annum (assumed rate of interest) would be charged for 12 days which translates to around Rs 30,000 per annum.

Now if we take the case of SBI Card IPO, HNI portion is reserved at 15 percent, which would be around Rs 1,550 crore worth of shares (15% of Rs 10,355 crore).

"For example, if the issue gets oversubscribed by 30 times, then the funding cost per share could be around Rs 75-80.  And on the current grey market premium of Rs 140 per share, the room for gains for HNIs could be Rs 60 per share," said Rudra.

But considering the current weak market conditions due to rising coronavirus fears worldwide, including India, the grey market premium has reduced to around Rs 120-140 now, from Rs 300-350 per share last week, expert said quoting sources.

"Say if HNIs book gets subscription of 25-30 times, which raised the HNIs cost to Rs 60-70 per share and given the grey market premium of around Rs 120 and issue price, the listing gains for them could be around Rs 50-55 per share," Manish Bhatt, Independent Analyst, told Moneycontrol.

He said now there has been no buyer and no seller at even Rs 900 per share price given the current market conditions.

According to him, Ultra HNIs, branded clients can get same funding at an interest rate of 9 percent due to their large book size, which could be more arbitrage kind of situation for them against other HNIs.