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Is there any risk in applying in the HNI category?

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Investment in the HNI category of IPO is a high-risk investment. An investor should have an understanding of risks and rewards when investing in this category.

Risks in applying in HNI Category

  • Investing Borrowed Money

    Most HNIs take IPO funding loans to invest in IPO. There are a few risks with this:

    1. You have to pay interest on the loan.
    2. In case the share prices go down on listing, you may have to book losses quickly.
    3. You have to sell allocated shares as soon as possible to repay the loan.
    4. You have to calculate the cost of each share carefully along with the estimation of oversubscription.
  • 10 Days Until Listing

    The IPO shares start trading in the market in 7 to 10 days. A lot can happen in those days. In case the market turns adverse in 10 days, you may incur huge losses on the listing day.

  • Number of Shares Applied

    The shares in the NII category for HNIs are allotted by the lottery system if the number of lots applied is less than NII over-subscription. In this case, you may not get the allotment. Even if you get it, it will be just one lot.

    HNIs with cash of 10-50 lakhs in their savings bank could apply with their funds. In this case, the risk is low but the chances of allotment are minimal too. Good IPO subscribes 300 to 1000 times in the NII category.

  • Cancel or Modify Bid

    HNIs are not permitted to revise or cancel the bid once placed. Most HNI's apply at the last minute.

  • Cannot apply on Cut-off Price

    HNIs are not permitted to apply at the cut-off price. They have to place the bid at a fixed price in the give price band. The HNIs doesn't get any allotment if the bid price is less than the price fixed for the IPO shares.

HNIs take a calculated risk on IPO funding. They calculate and estimate how much subscriptions will be in the HNI category. They apply for 10 to 20 times higher lots than subscriptions with the funded amount.

Example:

  • NII oversubscription (Expected): 100 Times
  • Applied Quantity: 1000+ Lots
  • Lot Size: 15 Shares
  • Allotment (Confirm): 10 Lots (if 100x Subscribed)
  • Interest Cost: Rs 120 per share (breakeven Point)
  • Total Interest Cost: Rs 120 * 10 Lots * 15 Shares per lot = Rs 18,000
  • Listing Gain per Share (Estimated): Rs 150 per Share
  • Profit: Rs 150 * 10 Lots * 15 Shares per lot = Rs 22,500
  • Net Profit (Estimated) = Rs 22,500 - Rs 18,000 (Interest Cost) = 4,500

Note in the above calculation, HNI has to estimate:

  • NII Oversubscription
  • Listing day gains

This is one of the key factors in calculating the grey market premium (GMP) of IPO shares.


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