The secret to HNI IPO funding that the RBI just killedThe secret to HNI IPO funding that the RBI just killed

[podcast]

 

How do High Net Worth Investors invest SO much in IPOs? Nykaa's IPO saw Rs. 1,00,000 crores invested by the well-heeled Indian investors. But not much of it is their own money - they borrow it.

In this episode, Deepak and Shray unravel the dynamics of an IPO application for HNIs. From the rules of allocation, the big business of IPO funding, how HNIs can borrow 100X their money,  systemic risks, how grey market premium (GMP) works, the role of regulators, and the road ahead.

Highlights

[4:35] IPO allocation for HNIs works differently than it works for retail. Unlike retail who get allotment via lottery for oversubscribed IPOs, HNIs get a proportional allocation. This means, if HNIs apply for 1 crore worth of shares, they get 1 lac worth of allocation for a 100X oversubscribed IPO.

Now, you'll think why do these HNIs put a total of 1.1 lac crore of CASH to invest in these IPOs only for a mere 1% allocation. Well, they do not put up the cash. They borrow. Without collateral.

[7:22] On the last day of IPO, you know that is IPO is getting 100X oversubscribed. Now you’re thinking, this is a hit IPO but I don’t have the cash to apply and wait for the allocation. So can I borrow this cash and apply for the IPO? And how would the loan dynamics work? It's all sorted and smooth.

[10:05] But now you’re thinking.. why would someone fund such a thing. Who will fund thousands of crores to HNIs to invest in stock market IPOs and themselves earn only 5% interest per anum?

[11:40] And now you are thinking, who is lending 1 lac crore to these NBFCs that are funding the IPO applications? Maybe, it’s you!

Since the lender (NBFC) is making only 0.1% on the money it lends because ~5% interest for 7 odd days translates to just 0.1%. How big is this business to make sense for the lenders? (Ans: Very big!)

[18:53] So, this is a beautiful system where everyone is making money. You’re now thinking about how can I get a piece of this. Well, wait. There’s a bummer. This is going to stop in 2 months.

[22:40] Now let's talk about the three-letter word that is religiously tracked before an IPO - the GMP. Who decides the GMP and where is this being traded?

[26:00] You can’t talk about IPOs and not recall the RPOWER IPO fiasco. Veteran folks can relive the nightmare while the newer ones can learn a bit from history.

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Transcript

Shray Chandra: Hi everyone and welcome to episode 45 of the Capitalmind Podcast. Today's episode is about the HNI IPO funding game. Now, as everyone knows, 2021 was quite the year for IPOs in India. There were some big hits, some big misses as well. We had something like 63 different IPOs last year, and the amount raised was almost 1.2 lakh crores. I mean, the highest ever. Although it seems a number is still lower than a number in 2010 and 2007, which is, of course, a different era. But I think, as we've seen with some interesting press coverage recently when it comes to HNIs and IPOs things work a little differently and so we've brought in Deepak today to tell us a bit about it. So Deepak, when you look at IPOs you see 100x oversubscribed, 80x oversubscribed and so on. These are some pretty big numbers. How does this happen? And HNIs have a big role to play in this right? Is HNI IPO applications, do they operate a little differently than how the rest of us work?

Deepak Shenoy: Oh yeah, of course Shray. In fact, if you think about what HNI applications are, essentially if you look at Nykaa, for instance, Nykaa's IPO saw a 112 times oversubscribed HNI reservation portion. Now I'll go into details of what that is, but effectively the IPO itself was roughly 217 crore shares, which at a 1,125 price point, was roughly 2.5 lakh crores. 50 percent of that money was actually from the HNIs, 1.1 odd lakh crores. Now, do HNIs actually have that kind of money to invest into a cosmetics company and 1.3 lakh crore is a lot. I mean, it's like probably, you know, 25 percent of India's personal taxes in the country. So really, do they have that much money to spend on one IPO? The answer is no. And we have to understand for this the IPO process itself. The IPO process has a reservation for different categories. So if you have a qualified institutional buyer, mutual funds, foreign institutions, governments of other countries, they invest, they have about 50 percent reservation in the IPO and the remaining 50 percent is divided between retail investor, who is a person who puts less than 2 lakh rupees worth of shares. And then a non institutional investor

Deepak Shenoy: typically what we call an HNI, this is 15 percent. So if IPO for Nykaa, for instance, was about 5300 crores, 800 crores was reserved for HNIs. Sounds good, sounds extremely exciting but what happened here is, the retail applications that are in an IPO they go through what is called a, "I want to serve the largest number of customers" kind of allotment process. So if a lot of people apply for an IPO, they first try to say, listen, I'll give you what you need. Oh, well, you know what there are too many applications. Then, let me try at least to give every single investor one lot and one lot is roughly 15,000 rupees. So they'll say, OK, one lot of 15,000 rupees, can I give everybody? If I can, then I'll try and work an arrangement for the remaining. If I can't even give everybody one lot, there's so many applicants that I can't even give one lot to an application then I will do what is called a lottery system where I'll say, OK, you know what? Everybody who applies, I'm going to choose randomly and the first N applications where all those N people get one lot each and that suffices the thirty five percent reservation is effectively your retailer subscription.

Shray Chandra: And that's it, then. So some people just walk away completely unlucky.

Deepak Shenoy: Yes, and that's why people feel very proud that they had invested. They have got something worth 15,000 rupees, even though they're worth probably many many times that because just getting that fifteen thousand rupee allocation is a...

Shray Chandra: Is a win. And I guess in Nykaa's case, the 15,000 becomes 30 you feel pretty good about it.

Deepak Shenoy: Ya I'll feel. I mean, it'll buy you a maybe I don't know.

Shray Chandra: Something good.

Deepak Shenoy: One tenth of an iPhone. I don't know, depending on whatever iPhone is nowadays. The interesting piece about HNIs is, it follows a completely different process. So the 15 percent allocation for HNIs goes like this, apply as much as you want. If you have 100x oversubscription on the HNI portion alone, that means 15 percent has been subscribed by 100x. Then, everybody gets 1 percent or whatever they had subscribed. So this is called a proportionate allocation. So, if you apply for 1 crore because you have to apply for more than 2 lakhs so you apply for 1 crore you'll [00:05:00] get 1 lakh rupee worth of shares. If you apply for 2 crores, you'll get 2 lakh rupees worth of shares and so on. Now, the whole IPO process takes just four days nowadays. So in the sense of there are three days for the actual IPO and after the IPO ends, there are four days to get your allocations, which means after the end of the IPO, they say, oh, how many people have applied? We'll do this formula thing and you'll allocate the shares to these individual investors based on, you know, how much they've applied, the proportionate allocation and so on. This is very interesting from the perspective of the HNIs, because you think that they're putting this 110,000 crores but they actually have not. So this four day is very interesting. The interest for the, so, for instance, there is a 110,000 crore investment for four days. Who makes the interest for those four days? It's a significant amount in crores.

Shray Chandra: Surely, the HNIs. It's their money.

Deepak Shenoy: Yeah. So the interesting thing is earlier what used to happen and this is before 2000, I don't know 2010, 11, 15, some time like that. Earlier you used to give your money to the merchant bankers. They would actually take the money and then give it back to you. If it was not allocated, the remaining shares would be remaining money would be given back to you after 4, 10, 15, whatever days. Now, because they were earning money on this float, SEBI said this is not a good thing they introduced something called ASBA. The ASBA concept is application supported by a blocked amount. So you have the money in your savings bank account. They block in the bank account so you can't take that money out for any other purpose. And then that money is now kept in abeyance for 4 days. You earn interest on that money for 4 days. But if, for instance, you have 1 lakh rupees in the ASBA account and only 15,000 rupees was taken because you got only one lot, then 85,000 is unblocked, 15,000 is taken out and you get shares worth 15,000 rupees. You don't lose any interest for those days that you are investing. Even then, do HNIs have 110,000 crores to put into a cosmetics company? That means even if they had it in their bank account, that means that much money is there.

Shray Chandra: And they wanted to block it for this one purpose.

Deepak Shenoy: For this one purpose, yes. But I think that statement would be true if you know everything in this country was fair and clean and all that stuff, but it's not. So there is a modus operandi, M.O. for this whole thing. The money is only locked in for four days. You also know, for instance, on the last day of this IPO because you know, the IPO status gets updated every hour that something is getting 100x oversubscribed. Now you're looking at this and saying boss, 100x means, if I apply for 1 crore, I will get one 1 lakh rupee worth of shares. Can I borrow? Because I want to and I'm an HNI. Can I borrow a 100 crore, so if I say if I have 5 crores, I want to borrow 495 crores so that I can apply for 500 crores for four days. Now I temporarily borrow it and it's blocked in my bank account. So, you know, I can't misuse the money and all that. And then I'll pay the interest for those four days, let's say, a week or something like that. And then because there's so much demand for this IPO, I'll get 5 crore worth of shares. I'll return the money and when it actually lists, which is about a week later, I'll actually use the time to pay back the interest on this loan now.

Shray Chandra: The gains on the 5 crores you got, I guess it can also help.

Deepak Shenoy: Yes, the gains on the 5 crores. So how much should it go up? I'll give you an example of Nykaa again. So Nykaa is actually, it's a very simple calculation. So if I have to borrow, let's say today's borrowing rates are 10 percent for a 495 crore loan. I will get the loan, I'll put it in my savings bank account. My savings bank account gives me, let just say, 3 percent. So my net interest cost is seven. So the 7 crore or the seven percent for 495 crores. This is for a five day period, if I add it up, it's about 48 lakh rupees, roughly 48. So if I have 5 crores of Nykaa now, it has to go up by 48 lakhs just for me to be able to pay back the interest, which is just a 10 percent increase, right? So if it's a 100x oversubscribed issue, the price needs to go up only by 10 percent for me to have made enough money to return. If my overall subscription is lower, it's only 50x. You'll find that this number is only 5 percent, so it needs to go up by 10 percent because of the oversubscription amount. If I were to borrow this 500 crores and, you know, use it and I'll get this 5 crore allocation, I can be fairly sure I'll get 5 crores because it's a proportionate allotment. The risk now, if Nykaa falls is on me, whoever is funding me is no longer going to. He's going to say, listen, I want my 47 lakhs in interest. I don't care how you do it, but please find a way and give me 47 lakhs.

Shray Chandra: Well, you're the HNI who just took 495 crores, so I'm sure you have 47 lakh or you'd better have 47 lakh somewhere else, right?

Deepak Shenoy: Yes. So they'll only give [00:10:00] it to people who think they can at least pay the 45 lakhs. I guess one of the things that we have to also think about is who will even fund such a thing, right? Clearly, banks can't. Banks like, you know, Kotak Bank or HDFC Bank, they have a limit on funding such things to I think 20 lakhs or something.

Shray Chandra: Because they don't like giving people 100x leverage.

Deepak Shenoy: Actually, there's an RBI rule against this. There's this quotas of what you can do against securities and so on. It's not something that banks will do. So all such lending happens through NBFC. Kotak Bank owns Kotak NBFC, which does something like this. There is Bajaj Finance, there is JM Financial. So what these NBFCs do, they also don't have 495 crores. Nobody has it lying around just like that. They also borrow it. They go to the something called the money markets, commercial paper markets and say the minimum borrowing period there is 7 days, so you can borrow for seven days. I don't know if the minimum is seven, but they borrow for typically seven days and say, well, I'll borrow all this money and fund the IPO accounts. These companies are borrowing at 5 percent odd for a 7 day period. Now 5 percent odd sounds like oh, ok, but you know what? The same companies, if they borrowed for seven days on any other time, they would pay only three and a half percent. That's because Bajaj Finance is actually almost like super Triple-A kind of a concept. So if Bajaj Finance were to borrow for seven days, I will give it, you know, the lowest interest rate possible and the lowest interest rate possible is about three and a half. So for a seven day period, anybody would borrow only for three and a half. But because people know this is for IPO funding and people are making a killing, everybody here is making a killing. So they also lend you money at a higher rate. Now, who lends money to the NBFCs? Your neighbourhood liquid fund, the liquid fund that you probably own.

Shray Chandra: Which gives me 3 percent?

Deepak Shenoy: Yeah. They find an opportunity to get 5 percent, they'll grab it. Yeah. So they put this money into this 5 percent thing so you get a slight bump on your liquid fund returns, for a week. Why does the NBFC do it? It says, well, you know what? I'm borrowing at 5, I can lend it to Shray at 10. And of course, Shray will earn 3 percent from a savings bank account. I don't care about that, but I'm getting out of this whole process. So, I make a neat 5 percent spread between my borrowing and lending rate. Even if it's for four or five days, how does it matter? And super secure, right? So if you look at the size of this business, Bajaj Finance today has 9,000 plus crores in assets under management just in the securities lending business, which has grown 80 percent from last year. So this is the latest, you know, December 2021 quarter. It is a ridiculously high number and there's almost no chance of an NPA here because you're sitting with all the money owned or controlled by. The problem that we are seeing is it's now it's the liquid fund has lend money to an NBFC, NBFC has lend money to HNI, HNI has kept the money in a bank account. That bank account goes and applies for an IPO. Then, within four days, the whole thing unravels all the way backwards. If you look at the scale of this, 100,000 crore plus borrowing by an NBFC is absolutely massive for a five day period. It is totally beyond, you know most other short term borrowing. So at this point, everybody is making money. Liquid funds are making slightly more money, NBFCs are making decent money. And the HNI who's apparently listing in an IPO that is 100x oversubscribed is obviously going to see at least a 10 percent pop on that stock, at least, or so, he thinks, and then he's also making money.

Shray Chandra: Seems too good to be true.

Deepak Shenoy: I guess what the NBFC might think about is, boss, how secure is this? If I give Shray 500 crores, can you not take the money and run away? You know, that's other thing that you know, they want to avoid. So they say, well, you know what? Shray is never going to see this money. We're going to open an account in a bank of our choice. We're gonna take a power of attorney on that account. We're going to lend money to that account and immediately block it against the application so it can't go out under any circumstances. And then as soon as the refund, the unblocking order comes, as soon as the allocation is done and whatever 5 crores is allocated to Shray or to anyone who's applying the remaining money is instantly returned to the NBFC itself. So they control this whole process. They fund the account only on the last day of the IPO. So you'll see that before the IPO, two days they'll be a 4 percent, 5 percent subscription. Last day, 110 times subscription. That's because everybody waits in the last day to actually put in their applications so the amount can be funded on the exact last day, you know, before 05:30, a big rush to do this and so on.

Shray Chandra: Also, I imagine that if the IPO is not doing very well, you don't want to be, you'll end up getting perhaps too much, right?

Deepak Shenoy: It happened in, for instance, Paytm's case where you had not enough of an application. So the HNI part of it was subscribed only 25 percent. That means 0.25x [00:15:00] because the banks, the NBFCs that were funding this, they said, you know what? We don't want to take the risk because of course, I could lend you money and your good for the interest. But why do you want to do it when there's so little interest in the first place? So while the retail and the QIB portions were subscribed, the HNI portion was not. It does happen, there is a feedback loop. The risk in this entire process is on the HNI.

Shray Chandra: They are the one who's on the hook by and large or the first person who's on the hook if something goes wrong.

Deepak Shenoy: I'll give you an example. The allocation process is four days after the IPO. SEBI has narrowed this down. It used to be two weeks now it's four days. Now, why is this four day thing relevant is that they want to reduce the amount of time this float was being misused by a lot of players. But what if there's a court case that happens on day two and the court says, well, you know what? Stall the allocation process until I tell you.

Shray Chandra: Oh, so this could happen.

Deepak Shenoy: This could happen. And who's on the hook? Because HNI is going to be paying interest on that 495 crores, for whatever time the court decides.

Shray Chandra: And they can't take it back.

Deepak Shenoy: Yes, and they don't have access to the money and the money is blocked in that account. And they're earning 3 percent and they're paying 10 percent. At some point, let's say this happens for two or three weeks.

Shray Chandra: This is very painful.

Deepak Shenoy: Now, the same 5 crore IPO guy is now 2 crores on the hook for interest. And now, you know, now the NBFC is getting jitters because, you know, if you've lent somebody a small amount of money, it's the person's problem. But if you lend them a large amount of money, it's also...

Shray Chandra: Is your problem, very much your problem?

Deepak Shenoy: So you you end up with this issue also that the NBFC itself has borrowed only for seven days.

Shray Chandra: Ah, so it has to refinance again.

Deepak Shenoy: So it has to refinance it again. And now the people who know that the court case is under way. They might be like, dude, 5 percent, come on, I'm going to let you borrow only at 8 percent or 10 percent. Suddenly, the cost for the NBFC goes up. Systemic issues start to happen because things start breaking, and the scale of the 100,000 crores is huge. So it's not a small number at all. So if you have something like this happen in one of those big IPOs, tail risk can completely, you know, we've not had this right now, but I'm telling you, I mean, it's what I'm saying is not out of the ordinary. The court can say, stall it, go for a holiday for two months and come back. Insane, but it happens. There's another issue that the HNI has now borrowed 500 crores for two weeks. What happens to your credit score? I mean, I'm thinking that if I go borrow a crazy sum of money, it's going to affect my credit score in some way. Today it doesn't, but tomorrow it might. They might just say, listen, you borrowed a crazy number of money. I can't give you another loan. So I go and apply for a home loan, they say, I'm sorry you're rejected because. And you know, an HNI will be like, excuse me, why are you rejecting me because of something I did in the past? But this could happen. Also, you can have some debt covenants and some of the other loans that you have taken saying if you take other loan anywhere else, then repayment has to happen equally to both loans, you know, in some way. Not so much of this happens in the personal loan space. Most of this happen in corporate loans, but if people start to introduce these kind of debt covenants, then you have an issue because suddenly I can't repay a 495 crore loan unless I've paid back my home loan, which sounds like a little extreme as a position to take, but it may be legally allowed or legally valid. So these extreme situations tail risk can happen.

Shray Chandra: I mean, this could be quite devastating, as you pointed out. I mean, you could truly it could be both a systemic risk or it could completely wipe out HNI in question. I mean,

Deepak Shenoy: And you know, from an HNI you become an I yeah, not even an I.

Shray Chandra: Interesting.

Deepak Shenoy: No net worth investor. So it could..

Shray Chandra: As you said, this has never happened. But this is how leverage is little dangerous and you need to think about it carefully. I mean, what your upside is. But so is this going to continue forever? I mean, now that you've highlighted this risk or...

Deepak Shenoy: Well, I think, you know, the smarter people in the world the RBIs and SEBIs is in the world have already recognized that this is a problem. So we are going to say bye bye to this from 2022 April, which means 2022 April one onwards things change.

Shray Chandra: Just two months from now.

Deepak Shenoy: Just two months from now. So what's happened actually, this is the reason why the Nykaa IPO funding got convoluted because one of the big guys, which is Kotak NBFC, stopped funding because an RBI circular came around. This was roughly around the last few days of the IPO, where they started to say HNI funding for IPOs by NBFCs is limited to one crore per pack.

Shray Chandra: And this came into effect right away or this was like a guidance thing, that this should be the thing?

Deepak Shenoy: It's going to be from April 1st 2022. So till then have your fun but after that...

Shray Chandra: And they were like, let's get started on this early.

Deepak Shenoy: So they were like, listen, if we do this and we make this a business, then it's going to be difficult to disentangle from it. So whatever commitments you've already done, we should do or maybe withdraw from commitments where we can. But you know, we're not going to do so much of this business going forward. Apart from that, it means also that, you know, first limit of 1 crore per person. But SEBI came and changed [00:20:00] the rules entirely in a board meeting, of course, the final thing has to come in terms of the actual rules. There is a concept around what an HNI is, which is more than 2 lakh rupee applications. Now they've divided that into two parts, 2-10 lakhs is an HNI, a high net worth investor. They get, I think, 5 percent out of the 15 percent allocation for HNIs. Above 10 lakhs is an HNI, which is or a VHNI if you may call it that, they get 10 percent of the allocation. So the whole thing compresses somewhat more in terms of two more layers. But there's also something called a proportionate allocation change, which means in this HNI application they will again try to optimize for the number of applicants and say the maximum number of people are going to be tried, they going to try and satisfy those many people. Here a lot may actually mean 2 lakh rupees, not the 15,000 rupees that's there for everybody else. Maybe a 2 lakh rupee thing. Once you get, everybody gets 2 lakhs at least only then do we do more for others. This will actually change the whole concept of doing, why do I need to do 500 crore funding? If a guy who has a 1 crore funding can get as much from an application, then as might be?

Shray Chandra: So in a sense, your proportionate to your money power pretty is eroded very significantly. And now I mean, only in some very rare circumstances will that work out.

Deepak Shenoy: And if I'm a lender, I'm going to look at this and say, Why am I giving you 500 crores? There's no chance you'll get even that 5 crore allocation. You might get only 1 crore. So the guy who invested 10 crores may also get a 1 crore allocation. The guy invested 500 crores may also get a 1 crore allocation. So because of that, people will try to now optimize for the number of applications rather than the amount per application.

Shray Chandra: The one per family member or something like that.

Deepak Shenoy: Yeah. So if I have 10 crores, I'll actually do a 2.5 crores per family member. If I have four in the house, I'll find friends to temporarily give money to give higher application number. The same way it happens in the retail IPOs, where there are people who will actually pay you per application just to apply. And then a broker will, many brokers may contact you for this saying, I'll give you 250 rupees to just apply to the Nykaa application because if you're one more person, then the chances of me getting the lottery are higher if I have more tickets in the play compared to me having a larger ticket size. This will impact HNI applications. It will impact to also something called a grey market premium. And the grey market premium is because people now bet on IPOs. There's a grey market that sits outside of the regular bourses and there's not a market, but this is where people like I said this 250 rupees per application, the amount is negotiated based on how well they think the IPO will do. In a way, this GMP goes on through the IPO process, so they'll say the GMP for Nykaa is 500 rupees.

Deepak Shenoy: That means a 1000 rupees share, but you pay 500 rupees more to get a semi certain kind of allocation, right? So that's a grey market premium on a per share basis that people bet on. The GMP goes up because of the number of applications that are going in. The number of applications go up because the GMP is going up. So in a way, these things feed on each other. And this concept will go because no longer will the grey market premium perhaps get readjusted so much upwards and therefore there's a 100x applications or 200x applications, it will change somewhat. The grey market will never go away because Indians are a betting kind. The world is a betting kind therefore it will keep going. But you know, this is where I think you know, the IPO frenzy will come down. One crore per application, maximum leverage, HNIs get proportionate, don't get proportionate allotment. The grey market premiums may come down quite substantially.

Shray Chandra: Will you stop seeing the 100x over subscriptions as well then perhaps?

Deepak Shenoy: I think the 100x may go away because you see out of this of this 110-120,000 crores that was applied for Nykaa about 80 to 90, maybe 95,000 crores was funded.

Shray Chandra: So that would essentially vanish now in this case.

Deepak Shenoy: I mean, because you can't find so many, you have to find 95,000 people that would qualify for a 1 crore loan each. I mean, the income tax department has barely found a little more of these people in comparison.

Shray Chandra: In the first place, so good luck...

Deepak Shenoy: In the first place, so good luck there yeah.

Shray Chandra: So in that sense, Deepak, what's the takeaway or the take-home point from this? I mean, one thing that comes to mind is this was pretty absurd lending in the first place I mean. So I mean, what do you think, I mean, in terms of advice or money making opportunities for Capitalmind customers? I think what you must be saying is tread carefully.

Deepak Shenoy: Well, [00:25:00] yeah, I mean, I think treading carefully is a, of course, you see, one of the things that seems to have come around here is that there is a lot of over leverage borrowing. I mean, you're putting 1 percent down to get 99 percent funding. This insane borrowing is as systemically bad thing, even if it's for four days. RBI did well to curtail it. SEBI has done well now to control some other parts of it. I think that systemic risk has more or less been controlled to a certain extent. For individuals, for an individual who is borrowing now, of course, somebody else gives me 500 crores for nothing. They don't take any of my life as a security. Then why would I have a problem? But it's a crazy thing to buy because you risk expose yourself to the risk of extreme ruin, right? So because only if you're ruined does the NBFC start to hurt because you'll have some covenants that say, well, I can take your house, I can take your this, I can take your that. And why as an HNI would you put that at risk? Remember in the R Power example, Reliance Power was a 10,000 or 11,000 crore IPO in 2008 January. Even that was a 110 times oversubscribed, 190 times oversubscribed for the HNIs. They borrowed money and they were that time there was no ASBA, so they would actually transfer the money over. So again, this was one of those crazy times everybody thought it will double.

Deepak Shenoy: But what really happened? Yeah, it opened 40 percent down I think. It opened at 290 for a stock that was IPO at 450. They did a bonus issue because they had to please these people. But then, by this time the HNIs already lost money. Think of it, you are 30 percent down and that time the IPO period was 15 days, not just one or two days. So on 15 days of interest and you didn't have this counterbalancing three percent interest, so you paid the full 10 percent for it. If you are done this 190x kind of thing, you would be exposed to extreme ruin. The same 47 lakhs for 5 crores would be interest. At that time, interest rates were also higher would be roughly one and a half crores. So a 5 lakh rupee investor sees his investment become 30 percent lower, which is three and a half crores. So he's lost one and a half crores there, and he's lost another one and a half crores to interest. He's going to be like boss what do I do? What just happened over here? It was an extreme situation at the time, so it exposes you to a risk of extreme ruin. And if you are, of course, a 5 crore net worth investor, you may not care too much. But then nobody wants to lose 3 crores. I mean, I don't care who you are, but..

Shray Chandra: Three crores in two weeks, 60 percent of your money. Bad outcomes.

Deepak Shenoy: Horrible. Yeah, I mean. And then, you know, the whole thing shouldn't exist in the first place. Why is anybody allowed to borrow 99x their money? It's not prudent lending because you have no security against it. You have the risk of extreme ruin, even as a lender into this thing. And there is systemic risk because now if the NBFC is in trouble, every single other depositor or lender to that NBFC or liquid funds, whatever they are, they're all in trouble. Why would you introduce systemic risk at this level without having a prudent framework in place? You should say, well, you know what? You can lend, you can lend seven I don't care how many 700 crores, but have a 10 percent capital buffer against it or 15 percent capital buffer against such things, then you know, suddenly all these things will stop. Say that, listen, for each IPO, I don't want to get your limits at the end of the month. I want it on a daily basis that you still need to meet these levels. So the IPO that's between 12th and 16th of a month may not even register as extreme lending scenario because RBIs reports are on the 30th of every month.

Deepak Shenoy: So you should create more prudent lending standards that say, well, every you know, you have to have a consistent framework, which, by the way, some of this is happening as we speak and RBI is addressing it with the prudential lending standards. But I think overall, such insane leverage based lending is a little insane, and we've talked about one or the other problems in the whole industry. We have a situation in say the NSE, where the whole futures market, which is effectively a leveraged market based on margin, has a backup of maybe only 10x, that means for 20,000 crore effective capital people are betting on something which is worth 200,000 crores. And I find that bad. Why wouldn't I find a 99x leverage horrible? Yeah, I think no. Just putting on that, I think it's a good thing HNI IPO funding is coming to an end. And of course, we had to have the drama to go with it with all the, you know, phone calls and all of that stuff. But I'm just happy that [00:30:00] we were behind us in a few months.

Shray Chandra: Yeah, I think both as my first boss and you currently say, this is like picking up pennies in front of the steamroller, right? It looks great until one day you look up and oh, and but in general, as you pointed out, I mean, as a societal thing, it doesn't make sense that we have introduced this, even this chance of systemic risk, just so that a few HNIs can get a higher allocation. This doesn't seem to be worth it as a trade off for anyone, maybe, except for the people who got lucky in that moment.

Deepak Shenoy: Yeah, I think the risk of ruin, always the problem with risks of ruin kind of trades is some people get extremely lucky and we've seen this in cryptocurrency. We're seeing this in HNI IPO funding. I'm sure we'll see this in a bunch of others. I just hope that it doesn't happen to any of us.

Shray Chandra: Well, thanks so much, Deepak. And so everyone, I think that's it for our show. Thanks so much for listening. If you made it this far, please take note of the discount code CMPODCAST for a 10 percent discount on a Capitalmind premium membership. You can see more of our episodes at capitalmind.in/podcast, and while you're on our site, you can learn more about our do-it-yourself and fully managed Portfolio Management Service at capitalmind.in. Deepak has a book out called Money Wise. It's available on Amazon and Flipkart or at shop.capitalmind.in if you want a personalized copy. And if you have any feedback, suggestions or topics for our next episode, please send over an email to podcast@capitalmind.in. So thanks everyone and thanks Deepak.