Govt stake sale buzz triggers build-up of short positions

Arbitrageurs aim to tap opportunities in PowerGrid, IndianOil

Savvy traders and investors are gearing up to make a quick buck from possible arbitrage opportunities in the coming share sales of power utility Power Grid Corporation and oil marketing company Indian Oil Corporation (IOC). The government, which has set a stiff disinvestment target of Rs 40,000 crore for the current financial year, is expected to sell its stake in the two public sector undertakings (PSUs) in the early part of December.

These traders are aiming to benefit from the difference between the current market price of these two stocks and their expected price in the follow-on public offer. For this, traders are building short positions by selling their December futures contracts in anticipation that the issue pricing will be lower than the current market price.

According to market grapevine, the PowerGrid offering is expected to be priced between Rs 85 and Rs 90 per share, while IndianOil OFS (offer for sale) could be done at around Rs 190 apiece — around 5 per cent discount to the current market prices.

Typically, traders build short positions in disinvestment candidates ahead of their stake sales and cover their positions later by applying in the share sale.

PowerGrid’s Rs 7,000 crore follow-on public offering (FPO) will hit the market on December 3, while the centre might sell 10 per cent stake in IndianOil in the second week of December.

“We are asking our clients to keep funds ready to build short positions in the futures market ahead of the share sales. It’s a near zero-risk strategy we are advising, which involves selling the stock in the futures market at a higher price and then applying in the public issue at a lower price,” said a senior official with a domestic brokerage asking not to be named.

Derivative analysts said good amount of build-up is already being witnessed in both PowerGrid and IndianOil over the last few trading sessions in the December series. Traders were also seen borrowing PowerGrid shares from the stock lending and borrowing (SLB) mechanism for creating short positions.

Market experts said the trading activity might increase once the PowerGrid’s price band is announced. A government panel is likely to take on call on the pricing for the PowerGrid offering on November 29.

“(Trading) activity might pick up once the price is announced. There also has to be a sense on what will be the amount of subscription,” said Siddharth Bhamre, head of derivatives, Angel Broking.

Some brokers are of the view, given the large size of the offering, the chances of full allotment in the retail category are fairly high.

In the past too, disinvestment has witnessed traders building short positions in companies such as NTPC, SAIL and Hindustan Copper ahead of their share sales.