A performer creates bubbles. (Photographer: Simon Dawson/Bloomberg)

The Four Unlisted Financial Services Firms Soaring In Over-The-Counter Market

Shares of some of the unlisted financial services companies that trade in the over-the-counter market have more than doubled over the last one year. And the demand is driven by rich individual investors hoping to cash in when they go public.

Indian equity markets scaled new records this year, riding on higher institutional inflows from domestic and foreign investors. And that’s rubbed off on the initial offerings of most of the companies that went public.

Yet, it’s the rich investors who led the demand charts. Shares earmarked for high net worth individuals were subscribed 166 times on an average in the 16 IPOs so far this year, more than twice the overall demand, according to data compiled by BloombergQuint.

HNIs are also driving the prices in the private market as institutions don’t buy at such levels, said Harshvardhan Roongta, a certified financial planner who runs Roongta Securities Ltd. With maiden offerings of companies like BSE Ltd. and ICICI Prudential Life Insurance Ltd., expectations have gone up, said Roongta. “Shares of unlisted companies have almost doubled in one year and there isn’t much left for private investors. We have been cautioning our clients against taking these bets.”

Among the financial services firms whose shares are in high demand in the private market are Catholic Syrian Bank, ICICI Lombard General Insurance, HDB Financial Services and Hero Fin Corp.

Catholic Syrian Bank

In May, Vallabh Bhanshali of Enam Holdings Pvt. Ltd. acquired a 4 percent stake in the bank from Thailand-based non-resident Indian Chansri Chawla family at Rs 160 per share, Mint reported in May. The share transfer pushed up valuations of the bank in the private market, forcing Prem Watsa-led Fairfax Financial Holdings to call off acquisition of the majority stake, another Mint report said in July.

The lender had issued preferential shares at Rs 100 apiece in January-February last year, according to its filings to the Registrar of Companies. Fairfax, which had received the Reserve Bank of India’s nod to acquire 51 percent stake with voting rights capped at 15 percent, wanted to buy shares around the same price, said a dealer in the over-the-counter market requesting anonymity.

The bank, buoyed by the stake acquired by Bhanshali and a turnaround in fortunes, wanted to sell shares at Rs 200, a two-fold jump in over a year, said the dealer.

It reported a profit of Rs 1.5 crore in the year ended March compared to a loss of Rs 150 crore in the previous year.

ICICI Lombard General Insurance

ICICI Lombard’s stock changed hands at Rs 257 apiece in June last year, said another dealer who helped high net worth individuals buy the insurer’s shares.

A large number of its shares were sold at close to Rs 330 apiece late last year as it was uncertain if ICICI Bank Ltd. would look at listing its general insurance arm, the dealer said. Fairfax reduced its stake in the insurance company by 12.18 percent in May this year at Rs 460 apiece, valuing it at close to Rs 20,300 crore. Two months later, ICICI Bank announced its plan to launch an initial public offer for the general insurer.

The supply of shares has since dried up and the price has more than doubled in a year to Rs 620-630, valuing the company at close to Rs 30,000 crore in the private market, according to the dealer quoted above.

HDB Financial Services

HDFC Bank Ltd., India’s second largest private sector lender by assets, has a non-banking financial company that does not accept deposits: HDB Financial Services Ltd. Its shares are in high demand in the private market.

With HDFC Bank’s Aditya Puri as chairman and Ramesh G as managing director and chief executive officer, HDB Financial is 96.2 percent owned by its parent. The remaining shares are held by employees and private individuals, including Amrita Puri, daughter of Aditya Puri. He did not hold any stake at the end of the last financial year.

The NBFC’s shares are being sold at Rs 585 apiece, valuing it at close to Rs 45,644 crore. The company had a book value of Rs 68.73 per share, with a price-to-book value of 8.5 times. That’s nearly twice the valuation of its parent.

Its profit jumped 30 percent to Rs 698.7 crore for the year ended March.

Hero Fin Corp

Hero Moto Corp Ltd. runs an NBFC that finances vehicles sold by India’s largest two-wheeler maker. The motorcycle major owns 41.03 percent in the company and the rest is held by the promoters – the Munjal family – and other private investors.

Besides financing vehicles, the NBFC also provides credit to Hero’s vendors and suppliers. It reported an income from operations of Rs 1,317 crore and a profit of Rs 249.4 crore in the last financial year.

Its shares are trading at Rs 1,200-1,300 in the private market, valuing the company at up to Rs 12,800 crore on a fully diluted basis, said one of the dealers quoted above. That’s an over two-fold jump over September last year when Hero Fin Corp issued shares to investors Otters Ltd. and Credit Suisse Singapore Ltd. and warrants to promoter entities at Rs 520.3 apiece.

Hero Fin Corp’s wholly owned subsidiary Hero Housing Finance Ltd. has applied for registration as a housing finance company to National Housing Bank. This has further fuelled valuations.