Do you often come across the news about HNIs, their net worth, their investment choices, etc.? Does this leave you wondering who they are and how they are unique from regular investors?
If yes, this is your guide to know about HNIs and their trades in the stock market.
Who are HNIs?
The full form of HNI is High Net worth Individuals.
HNIs are people with a vast investable net worth. There is no standard threshold that determines who an HNI is. Hence, the eligibility criteria change under different scenarios.
While some organisations consider the total net worth, the Income Tax Act in India uses the annual income to distinguish HNIs from other taxpayers.
Similarly, the Securities and Exchange Board of India (SEBI) considers the investable amount to identify a high-net-worth individual.
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HNI in the stock market
HNI traders are those investors who invest ₹ 2,00,000 or more in an Initial Public Offering (IPO).
The recent amendment by SEBI divided HNI Investors into two categories:
The first category is traders investing ₹ 2 lakhs to ₹ 10 lakhs.
The second category is traders investing ₹ 10 lakhs or more.
How are HNI investors different from retail investors?
- Investors investing less than ₹ 2,00,000 in IPO fall under the category of retail investors.
- A percentage of stocks are reserved for HNIs during the IPO but retail investors do not have any reservations.
- Retail investors usually buy shares in single lots. HNI trading happens in multiple lots.
- The retail category has more number of investors as compared to the HNI category.
Benefits for HNI traders
- Applying under the HNI category gives the opportunity for traders to hold shares worth ₹ 2 lakhs or more, which means there is a high scope for making large profits in the future.
- HNI traders do not have to register under SEBI or other exchanges. The application for IPO can directly happen through their net banking profiles.
- The lock-in period is a common factor for shares brought in IPO. The duration during which investors have a restriction on selling shares is called the lock-in period. Securities bought under the HNI category do not have any lock-in period.
- Banks and financial institutions provide specialised loans for traders who want to invest in the HNI category. Also, the funds remain in the investors’ bank account until allocations, and they earn interest even after the bank blocks the amount for trading.
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Limitations for HNI traders
- HNI investors do not have the option to withdraw or revise bids after placing them.
- Most investors resort to loans to apply under the HNI category. Investors incur heavy losses if the shares subscribed during the IPO do not perform well in the market later. Apart from losing the investment amount, investors must continue paying the interest on IPO loans.
- Certain companies provide discounts and other attractive offers to retail investors. HNIs cannot leverage these offers.
- Oversubscription during IPOs reduces the chances of allotment for HNI investors.
How to apply for IPO in the HNI category?
Application Supporting the Blocked Amount (ASBA) is an essential document to be filled out while applying as an HNI in an IPO.
Below are the steps to apply for IPO under the HNI category:
- Create a net banking profile for your bank account.
- Log in and go to the IPO section.
- Select the IPO application button to land on the online portal managing the IPO.
- Once the portal opens, choose the HNI category.
- Select the number of lots you intend to buy.
15% of the total shares offered in the IPO is reserved for the HNI category. So, the investor must apply within this limit. - HNI investors do not have the option to choose their bidding price. The highest bid is automatically blocked for them.
- After selecting the number of lots and bid price, the total amount of the application must be more than ₹ 2 lakhs. Otherwise, alter the number of lots to be eligible under the HNI category.
- Partial allocation is made to HNI investors in case of oversubscription during an IPO.
- Debit from the bank account takes place upon share allotment.
Investment avenues for HNIs
Some of the popular options for investments apart from IPOs are as below:
- Alternative Investment Funds (AIFs) – Apart from the regular investment options like equity and debt, there are other options available under AIF like real estate, hedge funds, venture capital, etc. These investments help in maintaining a diverse portfolio.
- Portfolio Management Service (PMS) – These are portfolio services managed by specialised managers well-versed in the market. This is a suitable option for HNIs who do not have the time to manage their investments.
- FDIs and FPIs – Foreign Direct Investments and Foreign Portfolio Investments are two avenues available for investors interested in international markets.
- Shares not listed on the stock exchange – Shares that are not eligible to be listed on the stock exchange are traded on the OTC (Over-the-counter) markets and are available for investors to trade.
- Market Linked Debentures – MLDs are derivatives whose value depends on underlying assets like currencies and indices. The value of MLD varies based on the underlying asset. They are risky but they also offer good returns.
Bottomline
Trading under the high net worth individual category offers varied benefits to investors.
High-net-worth individuals form a significant part of the economy. Since their risks are high, they usually tie up with wealth management firms to ensure proper investment of funds.
The HNI trading category, however, is flexible and widely accessible to the public. An individual who does not fall under the HNI category as per the Income Tax Act can still apply under the HNI trading category if the investment value is more than ₹ 2,00,000.
