There is both cash and futures strategy, but only HNIs should look at the latter
With the Shipping Corporation of India's follow-on public offer (FPO) opening on November 30, investors must be wondering if they should add more shares to their kitty, or use the issue as an exit route.
Typically, FPOs provide a good arbitrage opportunity. If the company's share price is more than the FPO price, a buyer gets a chance to exit the company at a higher price and enter at a lower level. But the window of opportunity may not last long, because the stock price will return to the FPO price before listing. Things can be completely different if the share price is lower.
What can help a retail investor is the discount offered during FPOs. Usually, retail investors can avail up to 5-10 per cent discount.
Cash market strategy
Let's understand this with the help of an illustration. Say an investor in Engineers India (EIL) sold 100 shares on July 22, when the stock was at `345 a share. He would have raised `34,500. Considering he held the stock for over a year, he would not have to pay capital gains tax.
Next, he applied in the FPO in the retail category, where shares were being offered at a discount of five per cent at `275.50 (five per cent discount on the price of `290).
Adding `65,500 to the capital raised, he could have applied for shares worth 1lakh. Since ASBA (application supported by blocked amount) is under force, the money will not be deducted from his account till the allotment has been made.
Based on the stock price, his eligibility was 364 stocks. However, since the subscription was almost three times, he was allotted 120 shares.
On the day of listing (July 27), he would have had 20 more stocks of EIL. And, he would have spent only `33,060 to acquire 120 stocks. It implies a profit of `5,510 in the form of stocks, plus another `1,440 cash profit. In total, he would have made a profit of `6,950 within a week. Additionally, he made listing gains, as EIL listed at `323.50.
But such leveraging may not be possible on every stock. There is a probability that one is playing on, considering there is a limited amount that a retail investor can apply for. Besides, he cannot be sure of what his allotment will be.
Once a company announces its FPO, the stock's movement also depends on the float. Typically, stocks of companies with a low float (implying that the number of stocks of the company is low) are in demand and command a scarcity premium.
The futures strategy
It is a strategy that is strictly recommended for only high networth individuals (HNIs).
Market players say HNIs often sell futures contracts to lock-in profits ahead of listing of new shares issued in FPOs.
