Coal India IPO – Experts worried about Retail Craze

Record subscriptions for the Coal India initial public offer (IPO) from retail investors have made people, from finance minister Pranab Mukherjee to company chairman Partha Bhattacharyya, happy, though some financial advisors are a worried a lot with the leverage the salaried class is taking to get a share of the pie.

India’s biggest share sale received 17 times subscriptions, or $55 billion, as investors expect to make quick returns on expectations that it may trade at a 20-25% premium to the offer price, based on the grey market transactions.

Men, like the 28-year-old Raj Wadhwa in New Delhi and software engineer Gaurav Prakash from the same city, are borrowing from banks to bid for Coal India shares to profit at the time of listing.

What they don’t factor in is that if the market tide turns as it happened in the case of Reliance Power’s share sale in 2008, they may sink with the stock leaving them servicing the debt from salary which could cut other discretionary consumption.Coal India IPO

“Some people bet on the hope that the government issue will not upturn their calculations but you should realise it’s not only the fundamentals of the company which determine the stock market play, but also the market conditions,” said Vikas Vasal, personal finance expert and partner at consulting company KPMG.

The IPO from the world’s largest coal producer has ignited such investor interest that from institutions to individuals, many are emptying their bank balances and borrowing to get the allotment. Although this is the biggest-ever share sale, attractive pricing and expert opinions that the prospects for short-term profit is bright is leading to a rush.

Engineer Prakash, who is investing borrowed money in the share sale, is confident that he would profit since state-owned companies are fundamentally sound and that some risk-taking is essential to get rich.

“The interesting bit here is that you can be sure of public sector companies which are coming out with offers,” says Prakash. “Risk toh spiderman ko bhi lena padta hai, (even spiderman has to take risks).”

Although investors have profited by buying shares of carmaker Maruti Suzuki and utility major NTPC, others such as the miner NMDC’s follow-on offer and NHPC’s were disappointing.

Bankers say that there is a sudden surge in the demand for personal loan, some of which may find its way to the stock market.

“There has been an increase in personal loans and that’s why we have increased it to 24 times the salary of the loan seeker from 18 times,” says an executive at India’s largest lender State Bank of India (SBI) who did not want to be identified. The tenure has been increased to 5 years, from four years.

Some recent successes have also boosted the investor optimism. Mr Wadhwa who earns Rs 50,000 a month selling insurance policies has taken a Rs 5 lakh loan from SBI to bid for the Coal India issue. After making a profit this year in the share sale of Jubilant Foodworks, which has more than tripled from the IPO price, Mr Wadhwa is sure that there’s no money-making if one doesn’t take risk.

He assumes that the shares would debut on November 4 at around Rs 280 a share, a 21% premium, after the prices are fixed at the top-end of the Rs 225-245 price band. Retail investors may have to pay Rs 232 a piece due to the declared 5% discount.

“Now here I am playing very safe and hoping for only 40% allotment, which means I will be effectively investing Rs 2 lakh in this IPO,” says Mr Wadhwa who wrote multiple applications in relatives’ names.Although these calculations appear rosy, the reality may turn as it is more driven by human emotions rather than mathematical formulae.

“It’s definitely high risk and high gain,” says Ashish Kapur, chief executive at investment advisory Invest Shopee.

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