Wednesday, October 30, 2013

Arbitrage Opportunity in NHPC

There is an interesting Low Risk Arbitrage Opportunity in NHPC, by virtue of it being in Derivatives segment.

NHPC has announced a buyback @19.25/- per share (CMP 18.10/-). There is a Tender offer for buyback. The Buyback is for 10% of the Equity, Wherein the Government has confirmed to tender shares in the buyback. The record date of determining eligible shareholders for buy-back is 8th Nov, 2013.

There will be buyback of 123 Crore Shares @ Rs 19.25/-

There are 2 level of Opportunity in the offer,

a) As per SEBI (Buy Back Regulation), 15% of the buyback in Tender offer has to be from retail investors. So Effectively they will have to buy 18.45 Crore share, effectively coming to acceptance ratio 30%, But the acceptance ratio in these category can be higher as most retail investors won't surrender the shares as their cost of acquisition would be much higher.

Effectively I expect an acceptance ratio of at least 60%. What about the price risk  ? That Risk can be hedged by selling the same quantity in futures market There is positive cost of carry.

Just a small caution, To be eligible as retail investor, you should hold not more than 10000 shares of NHPC on record date.

b) There lies opportunity for other investors also,  They can also tender the shares but the acceptance ratio will be not more than 10% to 12%. But the advantage is that you need not have to tender full quantity of shares buy only the eligible quantity. Effectively you can increase your acceptance ratio by creating position in Cash and selling them in futures in the ratio 1 lot against 11000 shares. Since the cost of carry is positive, you will earn interest.

Also you can reverse the position on any day after the record date to the extent of Short Quantity in Futures.

The taken to complete the buyback would be around 60 days to 75 days. 

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I have taken position in stock.

1 comment:

  1. Continuing its upward journey for the third straight session, the benchmark BSE Sensex spurted by nearly 104 points in early trade Tuesday on sustained fund inflows on hopes of strong economic measures in the upcoming Union Budget.
    free stock tips