Banks Will Lose Free Float Income Once IPO Listing Time Reduces
As you know, India’s capital markets regulator will reduce the IPO listing time from 21 days to seven days and this will be a significant blow to bankers to the share sales who enjoy the so-called float money on which they do not pay any interest.
Typically, the time between an investor putting in money for investing in an IPO and getting a refund after the shares are allotted, is three weeks and the bankers to the issue enjoy this money free for that period. Most IPOs are subscribed many times over and the banks have enjoyed this huge free float.
According to Delhi-based primary market data provider Prime Database, a set of domestic and foreign banks active in this space could have gained at least Rs2,300 crore in 2007-08 from this float. In 2006-07, banks made Rs630 crore from this business.
An analysis of IPO subscription data shows that 76 IPOs last year collected more than Rs 6.3 trillion from retail investors, high net worth individuals (HNIs) and qualified institutional investors (QIBs) and the money was kept with banks for 14-35 days. Assuming that the bankers who managed these IPOs deployed the money in the overnight call money market where the average return is around 6%, these banks made Rs2,316 crore. The overnight call market is an inter-bank market where cash-starved banks borrow to tide over their temporary asset-liability mismatches. The banks could have made substantially more money by deploying the float in other assets such as short-term treasury bills.
According to the Sebi proposal, investors’ money will not leave their accounts till they receive shares sold through a public issue. The banks will create a system of “locking” the money when an investor applies for an IPO and “unlocking” it after the shares are allotted. In other words, money will leave the investor’s account only after the shares are allotted.
This will virtually make the role of the bankers to the issue redundant. And, banks in which investors have accounts will enjoy the free float if they are not required to pay any interest for that period. However, it is not yet clear whether banks will pay interest to their depositors for the period when their money is “locked”.
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