Samir Arora says FIIs don’t make serious money in IPOs. Here’s why

Even when foreign institutional investors (FIIs) flood Indian IPOs with billion-dollar bids, they aren’t really making much money, said Samir Arora, founder and fund manager at Helios Capital Management. In a post on X (formerly Twitter) on Friday, Arora argued that despite headline-grabbing oversubscriptions, “FII investors don’t really make any serious money,” citing currency conversion losses, funding costs, and the mechanics of allocation that erode returns.

“It is pertinent to point out that when in an IPO the FII quota is oversubscribed 100 odd times, FII investors don’t really make any serious money,” Arora said. “This is because on a bid of 100 dollars he will get shares worth 1 dollar. If that stock goes up 40% he makes 0.4 dollars on a 100 dollar bid.”

Arora explained that the economics get worse once currency conversions are factored in. “When FII puts in a bid of US$100 he has to convert US$100 into INR and then convert back US$99 worth of INR back to US$ and that will take away around 0.2,” he said. A further weakening of the rupee, he warned, could wipe out any notional profit on the allocated shares.

For context, the Indian rupee has been hovering near its record low for most of this week at around 88.6850 per U.S. dollar. Meanwhile, the dollar index rose more than 1.5% for the week, its strongest showing since November 2024.

Borrowed money, shrinking margins

Adding to the pressure, most foreign investors don’t keep idle cash on hand for such bids. “Also few FIIs have US$100 lying around in cash so they normally borrow that money for 4-5 days and have to pay financing cost on that (or give up on the interest for that period),” Arora noted.

He added that while hedge fund managers track these expenses meticulously, many traditional long-only fund managers “don’t even know all the costs they incur when they ask their back office to make these bids so life goes on.”Arora’s comments come amid a flurry of big-ticket listings in India’s primary market. LG Electronics India’s IPO saw an eye-popping 54.02 times subscription this week, while Tata Capital’s public offer drew bids worth $1.24 billion, underscoring the strong global appetite for Indian equities despite tight valuations and a volatile currency.Also read | Explained: Reliance Industries is India’s most valuable company but why isn’t it No.1 in Nifty50 weight?(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)