Informist, Thursday, Oct 28, 2021
BY Richard Fargose
MUMBAI – Rates on ultra short-term commercial papers have surged 200-275 basis points from a month ago, ahead of the initial public offering of India’s second-most valued start-up, One97 Technologies Ltd, scheduled after Diwali.
The major factor behind the surge in commercial paper rates is the skyrocketing grey market premium on ongoing and upcoming initial public offers, market participants said.
The initial public offering of One97 Technologies, which operates the hugely popular unified payments interface Paytm, opens for subscription on Nov 8 and closes on Nov 10.
Premium in the grey market for the ongoing public offering of Nykaa parent FSN E-Commerce Ventures Ltd has soared to 25-60%. The initial offer of PB Fintech Ltd, parent of online insurance aggregator PolicyBazaar, also commands a similar premium.
Nykaa’s public offer opened for subscription today and will close on Monday. PB Fintech’s offer will open on Monday and will close on Nov 3.
Grey market premium is an indication of strong investor demand and points to listing gains.
The share sale financing model that is currently the rage in the short-term debt market is linked around such investments where returns are earned on listing gains. Such CP issues, generally done bilaterally, are built around the dates of the initial public offering and listing, and the cycle closes within 7-20 days.
The pricing for such ultra short-term issuances has risen on the hope that the listing gains are far higher than the interest cost, even though some recent public issues have seen lower listing prices, suggesting market fatigue.
“With such attractive grey market premium (on initial public offers), clients have no hesitation in borrowing funds at 10-13%,” said a treasury head at a non-banking finance company.
So far this week, non-banking finance companies have already raised 400-500 bln rupees through ultra short-term CPs for IPO funding.
On Wednesday, rates on such CPs maturing in up to 10 days shot up to 5.50-6.75% for even top-rated non-banking finance companies, from 3.65-4.00% a month earlier.
Market participants believe that the increase in quantum and tenure of variable reverse repo rate operations by the Reserve Bank of India, as a possible step towards liquidity normalisation, is also seen driving the surge in short-term rates.
Since August, the RBI has stepped up its efforts to absorb excess liquidity in the banking system by conducting variable rate reverse repo operations of varying tenures of up to 14 days.
At its monetary policy review on Oct 8, the RBI announced a roadmap to increase the quantum of its fortnightly reverse repos to 6 trln rupees from 4 trln rupees in tranches of 500 bln rupees.
On Wednesday, the central bank also announced a 28-day reverse repo auction of 500 bln rupees scheduled on Tuesday.
“Despite the festival season, the RBI is conducting longer tenure reverse repo,” said a dealer with brokerage firm. “This is a clear indication that the central bank wants to tighten funding for IPOs financing.”
The market is also guided by the fact that last week, along with revised norms for non-banking finance companies, the RBI announced a 10-mln-rupee limit per borrower for financing subscriptions to initial public offerings.
Informist on Oct 7 had reported that the RBI was concerned about the liquidity provided to banks feeding into pricey valuations during listing of shares.
With just five months left for the stringent initial public offer financing norms to kick in, most companies that are mulling share sale are looking to speed up their issuances. Similarly, as this is a relatively low-cost and high margin business, non-bank finance companies are also aggressively pushing investors to bid higher sums using initial public offer financing.
The possibility of allotment in the public offerings is higher if the bid sizes are larger, so many high net-worth and even retail investors are borrowing larger sums to place bigger bids, in the hope of exiting with listing gains.
Market participants believe that another 100-150 bps rise in ultra short-term CP rates is possible when the next round of fundraising starts next week for financing Paytm’s initial public offer, so far the biggest since Coal India.
Paytm has raised the size of its initial public offer to 183 bln rupees from 166 bln rupees.
Fundraising through ultra short-term CPs for the Paytm offer is pegged at 400-800 bln rupees, depending on grey market premium during the offer period. End
Edited by Aditya Sakorkar
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