Thread by @caswapnilkabra

A small thread to explain how HNIs pump up the grey market premium and lure the retail investors in applying for IPO.
@Vivek_Investor, @PranjalKamra, @gvkreddi, @Dinesh_Sairam

How many times has it happened to you as a retail investor that you applied for an IPO but couldn't get an allotment?
Quite often, right?
But that is not the case with HNIs.

For the uninitiated, HNIs are High Networth Investors, who invest more than ₹2 lakh in an IPO.
Retail investors on the other hand invest less than ₹2 lakh.

There are quotas in case of an IPO like
1. Retail quota
2. HNI quota
3. QIB quota, etc.

Retail less than ₹2 lakh, HNI more than ₹2 lakh and Qualified Institutional Buyers much higher.

When the retail portion is oversubscribed, the chances of a retail participant getting shares depends of lottery system. So if say a retail portion is oversubscribed 10x, the probability of you getting shares will be 1/10 (assuming everyone applies for 1 lot)

But this is not the case with HNIs.
In case of HNIs, there is a proportional allotment.
It means every HNI participant will get shares proportionately.

For ex:
If HNI portion gets oversubscribed say 20x then an HNI will get 1/20 times the money he invests in IPO. You see there is no lottery system.

HNIs are smarter than we think.
They borrow loan for just 7-10 days and pay interest for that period to invest in IPO. You can see why there is huge jump in the HNI quota on the third day of an IPO, because they are avoiding interest of first 2 days.

Let's see how it works.
Chemcon IPO was subscribed 450x in HNI quota. The upper price for Chemcon was ₹340
Say the rate of int. is 7%. For 7 days of borrowing, the interest cost per share comes to (₹340 × 450 × 7/100) × 7/365 = ₹205

Hence, their cost per share for Chemcon will be ₹205 + ₹340 which comes to ₹545.
Now, the stock gets a bumper listing at ₹731.
One can easily calculate the profit per share!
Thus HNIs are smarter than you and me.

So, a word of caution, do not see the IPO listing as an evidence that everything is great about the company. And if you are a retail investor who did not get shares in an IPO, wait for the things to cool off before you jump and buy.

And if you are there for the listing gains, book them before the price goes all south.