The huge oversubscription of the Maruti Udyog Ltd's initial public offering was largely due to the availability of cheap bank finance which made the IPO a very lucrative short-term investment proposition.
Agile investors have lapped up the easy fund provided by banks since they can get an almost assured return of 20 per cent over a fortnight.
The only condition is that investors should sell their share one rupee higher than the final issue price on the first day of listing. Looking at the market condition it does not seem to be a problem.
Consider this: An investor making a bid for Rs 115 a share would only have to cough up Rs 46, or 40 per cent, of the required investment. The rest is taken care of by banks who fund it at 50 APIs a share.
Given that the listing will take place within 15 days, an investor could make 20 per cent return on capital employed if the share opens a rupee higher than the final issue price.
Simply put, even after paying 50 APIs towards interest, an investor would gain 50 APIs on an investment of Rs 46 over a fortnight. This amounts to a 21 per cent annual return.
The cost to the investor comes down further if a retail investor went for higher financing. Banks have come out with a number of add-ons to sweeten the deal further.
ING Vysya Bank was charging a 10.50 per cent rate. The interest stood at 79 APIs a share for applying for 1,000 shares. The investor's interest cost went down to 49 APIs if he applied for 11,000 shares. The reduction in interest cost per share as the number of shares applied for increases was due to fixed documentation fee of Rs 250.
IDBI Bank, another aggressive financier, has made its product attractive by introducing "other features". The bank took a higher documentation fee of Rs 500 but the offer is valid for a year.
A dealer said there is a strong possibility that at least three IPOs will hit the market this year. "If it happens, the documentation charge per issue will be Rs 170," he said.
Indian Bank has fixed the interest rate at 11.5 per cent, on par with its prime lending rate.
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