Thread by @deepakshenoy

Why do some High Networth Investors get those incredibly high funding for IPOs? A thread:🧵

Take Nykaa. It was gangbuster nuts in terms of subscription. By the last day of the IPO, BSE reports showed the HNI reservation was 100x oversubscribed.

You put 1 crore rupees, you get 1 lakh rupees worth shares. If share doubles, you make 1 lakh but that's just 1%.

So NBFCs say: we'll lend you Rs. 49 cr. Added up, that's 50 cr. and you'll get 50 lakh rupees worth shares. If THAT doubles, now that's a 50 lakh profit - or a 50% "ROI".

HNI thinks if something's 100x subscribed at IPO, it's minimum 2x. (RPOWER people now pause to laugh/cry)

So NBFC works with a bank to create a "separate" bank account, where they put the money. You can't touch it, because this is not meant for you at all.

In four days, allocation's done, you get your 1% shares worth 50 lakh. The rest is returned to the bank, which NBFC takes back

You pay interest for say 4-5 days for the 49 cr. borrowed. At 10% a year minus 3% for the savings account interest, you pay a net 7%. This is about Rs. 100,000.

Since you now have Rs. 50 lakh worth shares, Nykaa only has to list at a 2% premium to IPO for you to breakeven.

It did list 100% up, so you made out like a bandit. In Paytm's case, the HNI subscription was weak (ended with only 25% subscribe) so NBFCs did not finance the HNIs at all.

Because eventually if the IPO doesn't do well, the HNI must pay for interest+fall in price.

Before the time Nykaa's IPO was on, RBI published the NBFC guidelines that limited such IPO funding to only Rs. 1 cr. per person, starting April 2022. Certain NBFCs decided to reduce that business anyhow, which might have played a role in the "refusing" to provide a loan.

This talk of 500 cr. etc. would only have gotten a person Rs. 5 cr. worth shares. Yes, it's a big number, but not like batshit insane big.

Also note: Banks aren't allowed to do this anyhow, they have limits. So it's all an NBFC thing. Lovely regulatory arbitrage, but it ends in April 2022.

And yes, your liquid and debt funds earned some extra moolah in 2021 because of this. NBFCs don't have so much money just to lend for four days so they borrow from the money markets. Where they pay a higher interest than anyone else for a 7day borrowing.

Here's where NBFCs paid about 5%+ for a 7 day tenure, when regular one-two week rates were at 3.5% or below:

https://twitter.com/deepakshenoy/status/1372192118291132422

Correction: the interest outgo in my example for 5 days would be about 5 lakh (not 1 lakh, which is per day).

So Nykaa should have listed at 10% higher for a breakeven.

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Also an old post that talks about the perils of it all: capitalmind.in/2017/05/the-pe…

And of course, I got the calculation wrong so the breakeven is 10% not 2%.

https://twitter.com/deepakshenoy/status/1480546866760597511