Thursday, January 17, 2008

Reliance Power premium slips in grey market

MUMBAI: Shrinking grey market premium in the Reliance Power issue, as a result of the bearish mood in the market in the past two sessions, is prompting investors in the non-institutional category to reduce their exposure to the issue. According to market sources, the grey market premium has now slipped to Rs 280, compared to Rs 320 on Tuesday and is way below the price of Rs 400 it had been commanding last week.

Many HNIs are said to have informed non-banking finance companies that they will not be requiring the entire lot of funds that they had initially committed to borrow. If the premium in the grey market narrows down, it would mean lower gains on the day of listing.

For those looking to booking profit immediately on listing this could be a loss making proposition because the listing price has to be significantly higher to cover the cost of borrowed funds. But this could be a boon to some other investors, who are taking a slightly longer-term view on the stock.

If one section of investors pull out, others are likely to get higher allotments. Should the market bounce back around the time of listing, these investors stand to earn higher profits. A day before the Reliance Power issue opened, the premium was hovering at Rs 380, more than 80% over the upper price band. Sensing this interest among retail and high net worth investors, banks and finance houses (many of which are arms of brokerages) have lined up for funding subscription.

The premium in the grey market is said to be going down due to the weakness in the secondary market. Even though other companies have not been isolated from this, it is more important in case of RPL due to the huge leverage by the non-institutional investors’ category through funding from NBFC and banks. This has resulted in HNIs’ excitement subsiding and they have been reducing leveraged bets for applying in the non-institutional category (which is for HNIs and corporates). As per data on NSE, the non-institutional portion of the book has been subscribed 6.5 times on the second day.

Many brokerages are advising their clients to take funding if they are looking at relatively long-term play and not merely for listing gains. The shrinking premium would mean that there would be lesser leverage and subsequently less over subscription. At the same time, if the market bounces back, investors would stand to gain as premium might go up and they would benefit from the higher allotment.

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