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How much to apply in NLIC FPO? High chances of 32% allotment to small investors; big investors may get just below 8% (Allotment analysis)

- ShareSansar, January 9, 2017  on Exclusive , Featured , Financial Analysis , Latest , Share Allotment , Stock Market
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Nepal Life Insurance Company Limited (NLIC) is floating its Further Public Offering (FPO) of 30,96,529 unit shares at Rs 1,425 (premium of Rs 1,325 added to the paid up value of Rs 100) worth Rs 4.41 arba from Poush 27, 2073.The offer is set to close on Magh 2, 2073 at the earliest.

Interested investors must apply for a minimum of 10 units of share amounting Rs 14,250 (10 units * Rs 1,425) and they can apply for up to 30,960 units of share amounting Rs 44,118,000 (30,960 units * Rs 1,425).

There is no share separately allotted for mutual fund and staff. Siddhartha Capital Ltd is the issue manager for the FPO.

Normally, investors applying Rs 50,000 or below per application form are classified as small investors. Here, the investors applying 30 units amount Rs 42,750 will be categorized as small investors and investors applying 40 units or more will be categorized as large investors. Security Allotment Guideline 2068 states that at least 40% of the securities being offered in IPO/FPO must be allotted to the small investors. However, if the total amount from the small investors exceeds the 40% of the total collected amount, this rule does not apply and all the shares will be distributed uniformly on pro-rata basis.

Last year, IPO of Hydroelectricity Investment & Development Company Limited (HIDCL) and FPO of Nepal Investment Bank Limited (NIB) had collected well over Rs 43 arba per issue, depicting higher liquidity in the market. There are high chances that demand for NLIC FPO will be less than IPO of HIDCL and FPO of NIB.

Why demand for NLIC FPO is likely to be less than IPO/FPO of HIDCL and NIB? 

  • Extreme liquidity shortage in the market.
  • NEPSE is in declining trend. Most of the investors are suffering loss, so they are holding their position, which means most of the investors won’t be able to sell their shares in loss and manage money.
  • Since NLIC FPO issue is at quarter end, most of the financial institutions won’t be able to issue loan and even if they get loans, they have to bear high interest rate. Thus, most of the rational investors will be discouraged to take loan, and will apply with their own money for lower cost of fund.
  • Several other IPO issues (Synergy Hydro, Samata Microfinance, and Forward Microfinance) and SBI FPO issue have divided investors’ fund.
  • Unlike HIDCL and NIB FPO issues, there is a maximum cap for investment which is only Rs 4.41 crore per form. This will automatically stop huge fund from institutional investors like BFIs, investment companies and many big individual investors. Maximum per form cap for NIB FPO was Rs 12 crore, and Rs 50 crore for HIDCL.

Based on this fact, maximum Rs 40 arba is expected from both small and big investors in NLIC further public offering.

What exactly does Securities Allotment Guidelines, 2068 say?

  • Shares are distributed on pro-rata system (uniformly).
  • Securities Board of Nepal (SEBON) recognizes two types of investor groups: Retail Investors or Small Investors Group (those who invest up to NPR. 50,000 per form); and Other Investors or Big Investors (who invest more than NPR. 50,000 per form).
  • 40 percent of total shares to be allotted are set aside for small investors
  • Remaining 60 percent is set aside for other investor group (big investors) applying of more than Fifty thousand rupees.
  • Out of the total initial public issue, 5% of shares is allotted to mutual funds and 2-5% is allotted to the employees of the issuing companies depending on their number.
  • If the demand for share from small investors exceeds more than 40 percent, then both the group is regarded as one, and all the shares are allotted on pro-rata basis to all the investors representing both groups.
  • Minimum 10 units need to be allotted to investors.

Securities Allotment Guidelines, 2068 has set two models of allotment depending upon shares demand

Model 1 – Equal Distribution to All Investors

After deducting the mutual fund and employee’s portion; a minimum of 40 percent shares has to be allotted to the retail investors. In case retail investors have contributed more than 40 percent of the amount collected, both types of investors (Retail Investors Group and Others Investors Group) will be considered as one or single group and the shares will be distributed equally in the same ratio to all investors.

Seeing the past big IPO/FPO trend, this model will not be applicable in NLIC FPO since demand from small investors group will be far below 40 percent of the total collection.

Model 2 – Variable Distribution to two groups

After deducting the employees and mutual funds portion; a minimum of 40 percent has to be allotted to the retail investors. In case retail investors have contributed less than 40 percent of the amount collected, then each group of investors will be considered as separate and the shares will be distributed in the following manner; 40% to the retail investors and 60% to the other investors group.

Let’s assume NLIC FPO distribution will be as per Model 2.

Nepal Life Insurance is issuing 30,96,429 units share at Rs 1,425 (Rs 1,325 as premium) per share to general public. Here, Mutual funds and staff are not allotted any share prior. So all the issued shares will be allotted to the general public.

FPO units3,096,429.00
FPO Amount Rs. (Total Units * Rs 1,425)4,412,411,325.00
Total Demand (Assumption)40,000,000,000.00
Times (Assumption)9.07

Assumption:

The total demand likely to be Rs 40 arba by 2,10,000 investors for NLIC FPO. In this case, we can assume 1,60,000 investors will fall under small investors category which means maximum demand from small investors will be Rs 6.84 arba (1,60,000 applicants*30 units *Rs 1425) out of Rs 40 arba collection and let’s assume small investors demand will be around Rs 5.5 arba since all of them are not going to apply 30 kitta or Rs 42,750. There would be option of 10 and 20 units too in small category of investors.

Note: In case of NIB FPO, there were 1,61,920 applicants for small investors category and in total 2,18,794 applicants in the FPO.

FPO units3,096,429.00
FPO Amount Rs. (Total Units * Rs 1,425)4,412,411,325.00
Total Demand (Assumption)40,000,000,000.00
Times (Assumption)9.07
Available for Small Investors (40% of FPO Amount)1,764,964,530.00
Available for Big Investors (60% of FPO Amount)2,647,446,795.00
Demand (Assumption)
Total Demand (Rs 40 Arba)40,000,000,000.00
Demand from Small Investors  (Rs 6 Arba)5,500,000,000.00
Demand from Big Investors  (Rs 34 Arba)34,500,000,000.00

Here, the total demand from small investors group and others investors groups are as follows:

% Demand from Small Investors = Rs (5.5/40) Arba = 13.75%

% Demand from Big Investors = Rs (34.5/40) Arba = 86.25%

Since the demand from small investors group is just 13.5% of total demand. Now the allotment will be done by taking both groups as different and 40% shares will be allotted to small investors group and remaining 60% shares will be allotted to big investors group.

Small Investors: Applying from (10-30) Kitta

AAvailable for Retails Investors (Rs.)1,764,964,530.00
BDemand of Retail Investors (Rs.)5,500,000,000.00
C% Allotment (C=A/B*100)32.09%

Big Investors:  Applying from (40 – 30,960) Kitta

AAvailable for Big Investors (Rs.)2,647,446,795.00
BDemand of Big Investors (Rs.)34,500,000,000.00
C% Allotment (C=A/B*100)7.67%

Conclusion:

  • High probability of small investors getting 32.09% of shares which means investors applying for 30 kitta will get 10 kitta and investors who investing for 10 and 20 kitta will fall under lottery.
  • High probability of big investors getting 7.67% of shares which means investors applying for 40-120 kitta will fall under lottery and investors investing for 130 kitta will get 10 kitta. Above 140 kitta, investors will get 7.67% proportionately.
  • Since chances of investors who apply for 30 kitta and 130 likely to be same, it is highly recommended to apply for 30 kitta, or else apply for more than 130 kitta.

(Disclaimer: The above calculations are solely based on some assumptions. Results may vary when real data is published)

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Also Read:

Investors who bought NLIC at high prices after FPO announcement in distress; Whom to blame: the Company, Regulator, or Investors?

ShareSansar IPO Allotment Calculator

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