NewsIPOFIIs Face Minimal Returns in Indian IPOs Despite Massive Oversubscriptions, Says Helios Capital's Samir AroraFIIs Face Minimal Returns in Indian IPOs Despite Massive Oversubscriptions, Says Helios Capital's Samir Arora
Samir Arora of Helios Capital Management reveals that Foreign Institutional Investors (FIIs) make minimal profits from Indian IPOs despite high oversubscriptions. Due to allocation limits, a 100 times oversubscribed IPO yields only ₹100 worth of shares for every ₹10,000 bid. Even with a 40% stock gain, the return is merely 0.4% of the initial bid. Currency conversion costs, weakening rupee, and financing expenses further erode profits. Recent IPOs like LG Electronics India and Tata Capital still attract strong global interest, highlighting a disconnect between market perception and financial reality for FIIs.
*this image is generated using AI for illustrative purposes only.
Samir Arora, the founder and fund manager at Helios Capital Management, has shed light on a counterintuitive aspect of foreign institutional investors' (FIIs) participation in Indian initial public offerings (IPOs). Despite the apparent enthusiasm reflected in billion-dollar bids and massive oversubscriptions, Arora argues that FIIs don't actually make substantial profits from these investments.
The Math Behind Minimal Returns
Arora's argument is based on the following key points:
Oversubscription and Allocation: When FII quotas are oversubscribed 100 times, investors receive only ₹100 worth of shares for every ₹10,000 bid.
Potential Gains: Even with a significant 40% stock gain post-listing, the actual return is minimal:
- For every ₹10,000 bid, the gain would be merely ₹40 (0.4% of the initial bid).
Currency Conversion Costs: These further erode profits by approximately ₹20 per ₹10,000 bid.
Additional Risks: The weakening rupee poses another risk factor. The Indian rupee has been trading near record lows at around 88.69 per U.S. dollar, while the dollar index rose over 1.5% for the week.
Financing Costs: Most FIIs borrow money for 4-5 days to fund their bids, incurring additional financing costs.
The Hidden Costs
Arora notes that while hedge funds meticulously track these expenses, traditional long-only fund managers often remain unaware of the total costs involved in participating in Indian IPOs.
Recent IPO Trends
Despite these challenges, recent IPOs have seen strong global appetite for Indian equities:
| IPO | Subscription Rate | Bid Amount |
|---|---|---|
| LG Electronics India | 54.02 | Not specified |
| Tata Capital | Not specified | $1.24 |
Expert Analysis
Shriram Shekhar, a financial expert specializing in corporate actions and macroeconomic news, offers his perspective: "Arora's insights reveal a fascinating paradox in the Indian IPO market. While the headlines often focus on oversubscription rates and the apparent enthusiasm of foreign investors, the reality of returns for FIIs is far more nuanced. This disconnect between perception and financial reality underscores the importance of looking beyond surface-level metrics when assessing market dynamics."
Shekhar adds, "The currency risk factor highlighted by Arora is particularly pertinent in the current global economic climate. With the Indian rupee near record lows against the U.S. dollar, foreign investors need to factor in not just potential stock gains, but also currency fluctuations that can significantly impact their real returns."
In conclusion, while Indian IPOs continue to attract substantial foreign interest, as evidenced by recent offerings like LG Electronics India and Tata Capital, Arora's analysis suggests that the actual profitability for FIIs might be far less than what the oversubscription numbers might imply. This insight provides a valuable perspective for both institutional and retail investors looking to participate in the Indian IPO market.
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