Coal India IPO- Part II

Coal India- Part II

A dear friend called me from Delhi and informed me that he has read my blog and he has applied for the same before reading my blog. I was very happy that some body is reading my blog. More so Mr. D as he is a very busy man. But what I was surprised to learn was that he has not applied in the retail investor category but in the HNI category and in order to apply for a large no of shares he has taken a personal loan at the rate of 15% per annum from a bank to apply for the same.

Now his logic was if the Coal India IPO is such a wonderful thing that definitely he is going to make more than the 15% he is paying to the bank on the interest rate.

Without going to go into too many calculations here are my arguments against taking a personal loan to apply for an IPO:

1. IPO is a lottery you are not sure how many stocks you will get in the allotment.
2. The more successful and IPO the less your chances of getting a higher number of shares as the pie will be divided amongst more number of applicants.
3. There is no guarantee that just because more number of applications has come you will make money out of the IPO. Just remember the Reliance Power IPO which was highly oversubscribed but still investors ended loosing money.
4. The listing gains are fully taxable if sold before a year and you will not get a deduction for the interest that you pay to the bank for the application money as it is a personal loan and not a business loan. ( Comments needed on this belief)
5. But the biggest reason I am against taking a loan for applying for an IPO is that in principle I am against taking debt to play in stock markets. As the markets are highly volatile and can swing either way in a very short time. You don’t want to be caught in a situation when you have taken a loan to buy stocks and the price drops substantially. So now you are stuck with a stock that is below your acquisition price and you have a loan to pay for.

SEBI has raised the limit for retail investors to Rs 200000/- per IPO going forward and this will tempt more and more investors to look at financing from banks to apply for IPOs. I would strongly recommend to not taking a loan to apply for IPO or to invest in stock market no matter how strong your conviction about the stock is.

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