India IPO tests depth of options crackdown

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By Shritama BoseA lucrative options trade is turning into a non-option for Indian brokers. Groww, India’s largest stockbroker backed by Peak XV Partners and Tiger Global, on Friday priced shares for its $754 million Mumbai initial public offering at a $7 billion valuation. That’s a bold bet, considering regulators appear only halfway through a crackdown on options trading designed to protect retail investors from significant losses and to curb excessive speculation.Founded in 2016 by CEO Lalit Keshre and three former colleagues from Flipkart, the Walmart-backed NYSE:WMT e-commerce giant, Groww’s parent company—Billionbrains Garage Ventures NSE:GROWW—began by offering stocks and mutual funds to retail investors online. Its success in attracting first-time investors has propelled Groww past privately-held rival Zerodha, cementing its position as India’s top stockbroker.Groww boasts over 14 million active users, including 26% of the National Stock Exchange’s active client base. The median age of its clients is 31. It also captures one in every three new monthly systematic mutual fund subscriptions. With revenue growing at an annual clip of 50%, the platform’s momentum is hard to ignore.New rules from the Securities and Exchange Board of India are proving costly for business. The regulator is raising minimum order sizes and capping options exposure. As a result, the number of traders with less than 10,000 rupees ($113) in their accounts halved to 450,000 in the year to September 30. Derivatives trading made up over 49% of Groww’s total revenue as of June—higher than listed rival Angel One’s NSE:ANGELONE 45%, according to estimates from Nuvama analysts.Groww's net profit could hit 15.13 billion rupees ($172 million) in the current financial year to March, based on its June quarter result. A $7 billion valuation would imply a multiple of 41 times earnings, higher than Angel One's 25 times. The valuation will look even richer if SEBI winds down derivative contracts that expire weekly, when trading tends to peak, or tightens rules for high-frequency traders after alleging Jane Street had manipulated indexes. The U.S. firm denies the charge. The Abu Dhabi Investment Authority and Norway's Government Pension Fund Global are among the top buyers of Groww's shares, which are due to start trading on Wednesday. Investors are betting that the company can diversify its b...

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