The Securities and Exchange Board of India is looking at aligning the trade settlement cycle for offer for sale (OFS) with the cash segment, after it came to light that a variation between the two had opened a huge arbitrage opportunity for punters.
The settlement for OFS takes place on a T+1 basis (transaction date plus one day), while a normal trade is settled on a T+2 basis (transaction date plus two days).
Thanks to the steep discount between Hindustan Copper Ltd’s (HCL) floor price and the secondary market price, a number of speculators had short-sold the stock in the cash market and bid for an equal amount in the OFS. Later, shares bought in the OFS were used for securities pay out in the cash segment.
Both Hindustan Copper and Blue Dart OFS presented a huge arbitrage opportunity for investors
|Floor price (Rs)
|Market price** (Rs)
|Indicative price (Rs)
|Total bids received*
|Source; BSE; Note: *No of shares (in million), **On OFS day
Trades under OFS are settled on the T+1 basis as investors have to cough up 100 per cent upfront margins. Analysts said different settlement cycles indeed provide for an arbitrage opportunity but it was accentuated as HCL shares were offered at a sharp 40 per cent discount in the OFS.
Punters could have easily made about 40 per cent profit last week in the Hindustan Copper OFS.
Shares of the state-owned copper manufacturer had closed at Rs 266 on Thursday, the day it announced the floor price of Rs 155 for its OFS to be held next day. After the stock opened on Friday, due to heavy selling pressure, it hit the lower circuit limit of 20 per cent to close at Rs 213. Traders, who could sell the stock in the cash segment, entered bids in the OFS for an equal amount. Assuming a trader sold shares at a lower price of Rs 213 in cash and bought shares in OFS at Rs 156, he would have made a profit of at least 37 per cent.
“Sebi should look at whether HCL was an anomaly or is it a consistent practice for all OFS,” said Arun Kejriwal, founder, KRIS Research.
Analysts said a similar strategy was used in the Blue Dart OFS, which was held on the same day. The floor price for the Blue Dart OFS was fixed at Rs 1,720, while the secondary market price was nearly Rs 2,015. The bids for Blue Dart were accepted at an indicative price of Rs 1,833. However, in the case of Blue Dart, allotment under OFS was not guaranteed, as the share-sale was subscribed.