While some traders mounted bearish bets on NTPC derivative contracts in anticipation of a reduced price in the offer for sale (OFS), what is different this time is many market participants have short-sold the power utility firm’s shares by borrowing these through the stock lending and borrowing (SLB) mechanism.
Analysts said traders had been short-selling NTPC shares over the last three days, resulting in a surge in trading volumes on its SLB window. On Wednesday, about 1.2 million shares, nearly three times the number yesterday, were borrowed through NTPC’s SLB window on the National Stock Exchange.
Under the SLB mechanism, which is yet to take off in a big way, a shareholder, usually a long-term one, lends his idle shares to a trader who wants to short-sell the stock for a fee. A short-seller sells the shares, as he expects the stock to slide. If the shares fall, the short-seller buys these back and returns these to the lender. The profit for the short-seller is the difference in the prices at which he sells and buys back.
The price for borrowing NTPC shares rose 41 per cent to Rs 2.55 apiece, an indication of the rising interest in short-selling. In the past three days, about 1.5 million open positions have been created.
Traders who short-sold NTPC shares at the beginning of the week are likely to record a spread of as high as Rs 10 a share, after factoring in the SLB cost. “Investors who borrowed under SLB and sold at the right price would make a decent spread,” said Yogesh Radke, head of quantitative research at Edelweiss Financial Securities.
On Wednesday, NTPC shares fell to about Rs 152.3 on the BSE. The spread would be narrower for those who short-sold at prices close to the closing price.
In the past, traders have used different trading strategies to profit from an OFS. The most common was selling the securities in the cash market on the OFS day and making the pay-out through shares brought through bidding. This is possible, as trades under OFS are settled on the next day (T+1), while the security pay-out takes places on a T+2 basis.
This strategy was successful during the Hindustan Copper OFS, with traders recording a spread of about 40 per cent.
However, as the two previous government share sales —in NMDC and Oil India — saw huge subscriptions, this strategy went awry for some traders, who didn’t record allotment.
“Most trading strategies for an OFS are subject to allotment risks. But given the large size of the NTPC issue, the probability of getting allotment is higher,” said Radke. In the futures and options segment, traders sold NTPC futures and call options at higher levels. “NTPC futures, which are scantily traded, saw a 29 per cent jump in open interest, while call writing stood at 150-160 levels. This suggests a negative bias,” said Shashank Mehta, derivatives strategist, Shah Investor Home.