Investors use 'future' strategy to profit from PGCIL FPO

Short the stock, hope to get shares much cheaper in the follow-on offer

Power Grid Corporation of India (PGCIL) has been one of the top traded derivatives contracts in the last few sessions. This is because investors embarked on a time-tested strategy amid the follow-on offering (FPO) of the government-owned entity. The frenzy has been such that the market-wide position limit in the stock was crossed today. As a result, exchanges barred brokers from creating fresh positions.

According to derivatives experts, many traders are going short on the stock in the derivatives segment in anticipation of allotment in the FPO. With the FPO attractively priced at Rs85-90, investors are locking-in a decent profit, as the derivatives contracts are trading well above the upper end of the price band.

The game-plan is simple. Investors are shorting the stock, with a plan to square off the positions later based on the FPO allotment at Rs90 a share. According to data on the National Stock Exchange website, futures contracts for November expiry are trading around Rs100.

“The strategy was widely used in the past few sessions, but with the market-wide position being crossed, this is the end of it,” said T S Harihar, senior vice-president, ICICI Securities. “There was a lot of demand for the Rs90 put option and the Rs110 call option from traders looking to reduce their risk. There is a feeling the issue will be subscribed 10 to 15 times,” said Harihar.

PGCIL has seen a steady rise in the number of contracts and the quantum of open interest. On October 25, 3,447 contracts were traded, which rose to 35,047 today. The open interest in the period surged from 18.57 million to 103.58 million. The stock closed at Rs102.15 in the cash segment today.

Interestingly, there was a buzz in the market that some brokers tried to trade large blocks even after the market-wide position was breached. Derivatives dealers said there could be instances of such brokers being penalised by the exchange.

Meanwhile, market players are talking about a change of stance towards the FPO from investors, especially high networth individuals (HNIs), after the breach of the position limit.

“The run-up in the price after the announcement of the price band has created interest from all categories of investors, particularly HNIs,” said Arun Kejriwal, director, KRIS. “This led to the market-wide position limit being crossed and could lead to dampening of interest, as locking-in of returns will not be possible now,” he explained.

Issue subscribed 3.61 times on Day 2

The follow-on offer of Power Grid Corporation has been subscribed 3.61 times on the second day, with bids received for 3,037.09 million shares. According to NSE, the portion reserved for institutional investors has been subscribed 7.03 times. Retail and high networth individual segments have been subscribed 0.24 times and 0.16 times, respectively.