The latest public issue of Punjab National Bank is providing a 5 to 7 per cent arbitrage opportunity to investors.
The trigger is the relatively low pricing of the issue which is in a band of Rs 350-390 per share.
Foreign institutional investors and high net worth individuals (HNI) are thus making a killing at the PNB counter which resulted in the stock hitting an intra-day high of Rs 521 on Monday.
The modus operandi is simple: An HNI applies for shares in the public issue. Expecting the price to be fixed at Rs 390, the total cost of acquiring each share from the issue (if investors opt for a margin funding) works out to be around Rs 420-425.
Private financiers are lending at 16-17 per cent for the issue, while the HNI hedges its position in the futures market by selling the futures contract which today is available at Rs 462).
Post-allotment, the HNI can square off its position in the futures market at a lower price, thus gaining in the bargaining, even if the shares are acquired on margin funding at Rs 420-425.
This is presumed on expectations that the HNI category of the issue gets subscribed nearly 15 times. In the process, an investor expects to make a clean arbitrage of five-seven per cent.
However, there is a catch. More the issue gets oversubscribed in the HNI section, the lesser will be the arbitrage opportunity as the number of shares available will be less. The PNB stock was up 0.69 per cent to Rs 489.05 on the Bombay Stock Exchange on Friday. Dealing room sources confirmed the trend.
FIIs, on the other hand, are engaged in another set of trading. During the week, they could sell the shares in the cash market at Rs 482-510 per share.
Later, they buy the stocks in the futures market at Rs 460, thus earning a clear arbitrage of 12-13 per cent. The activity is rife with foreign institutions as there is no separate allotment for FIIs in the issue. FII holding in the bank is currently at 15 per cent as against the government-stipulated level of 20 per cent.
PNB stock futures are currently trading below the cash market price, taking a clear advantage of the option contract, said a BSE broker.
Data culled from BSE suggest that average volume of shares traded at the PNB counter has gone up from the usual level of 15-30 lakh to a whopping 86 lakh-1.5 crore in the last three days.
Similarly, the traded volume in stock futures of PNB on the National Stock Exchange futures and options segment have shot up in line with the cash segment.
Traded volumes in PNB futures have gone up by Rs 120-130 crore to Rs 420-825 crore over the same period.
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