SEBI Buyback Guidelines : Opportunity in National Aluminium

Business Schools taught us , Companies do Buyback of Shares to enhance shareholders value. But because of  Budget,2016 and New SEBI Buyback Guidelines , There are new reasons for buyback.

a) Do buyback instead of paying Dividend to avoid paying Taxes.

b) Do buyback to use company reserves for funding needs of Promoter / Government. (Instead of OFS)

I am writing this post on calculated risk  / Low risk Arb opportunity. Discussing on implication of Buyback with above rationale can be by another blog.

There are spate of Buyback happening in the Indian market by Private Sector companies and Public Sector companies. There is SEBI guidelines that Buyback from Small shareholders (Holding shares valued at not more than Rs 2 lacs) should be made as per there entitled share holding ratio or 15 % whichever is higher (Refer SEBI guideline linked above).

It is noticed that small shareholders may form more than 90 % to 95 % of the number of shareholders, but they may not hold more than 5% to 10% of the share capital. Also Higher the promoter holding, lesser will be holding of small shareholders in percentage terms.

It means the lesser the percentage of Retail shareholding, Higher will be the acceptance ratio in Buy back., Also there will be many long term investors, who would not want to tender the shares (Also sometime, they wont, if their cost of purchase is higher), which will further push up the acceptance ratio.

There will also be many big Investors, who would not participate in such arb trade, they may not be able to buy such quantity back from normal market without impacting prices. There will also be large investors, who would not participate in Buyback as Arb returns may be lesser than Tax impact on selling of shares.

Private sector companies like Wipro, Bharti Infratel, Novartis came out with Buyback, They are doing buyback of shares, but Promoters are also participating in buyback, clearly with an intention to get money from the company and in more Tax effective way.

Recently PSU like National Aluminum (Nalco) , MOIL and NMDC have declared Buyback, The Buyback seems done only to give reserves back to promoters (Government), participation by other shareholders in collateral.

But There is opportunity for small shareholders based on acceptance ratio. I will not calculate returns but try to calculate acceptance ratio.

I will discuss my rationale of Buyback opportunity in Nalco  below as they have already asked for Postal Ballot.

National Aluminum : Nalco is a profit making, dividend paying PSU, It has a dividend yield of almost 4 %, and trades at PE of 15. Its book value is around Rs 52/-. It has buyback of Shares at Rs 44/- (CMP 41.50).

We will look at share holding Data, to arrive at acceptance ratio.

No of issued Shares	2577238512
% of Promoter holding (GOI)	80.93
No of small shareholders	80998
Qty held by small shareholders	52809370
% of Qty by Small share holders	2.05
Total Buyback qty	644309628
% of Buyback	25%
BB Qty for Small Share holders	96646444
in Buy back
Fund holdings	313062101
Fund holdings %	12.15
Other Major Shareholders	59987235
Other Major Shareholders %	2.33
BB Qty for Goi	443223814.8
BB Qty for Other Share holders	104439369.2
Total Floating Stock	491455890
Total share by large share holding,
more that 1 %	265457683

From the above table, we can see that, there is high probability of 100 % acceptance ratio for small share holders, If it is bought now also, because The offer is to buy more than 9.66 crore shares and there are only 5.28 in that bracket. 

Also as LIC, Bajaj and Hindalco hold chunk of 26.54 crore share, which I feel will mostly not be tendered in Buyback. Also if we remove all Institutional shareholder and Share holder, the remaining float would be 118406554. Whereas Buyback qty is much more.

There can be change in acceptance ratio if Price falls, but then fundamental will come into play and many value buyers will enter the market to support the price. Also to qualify GOI have put its intention to tender 100 % qty of Buyback, (That may happen if price of Nalco move above 44 /-)

I will calculate acceptance ratio of other companies as and when they finalize their buyback QTY and Price, and send it for approval of shareholders.

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

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased

Can Additional Periodic Pice Band on BSE distort Pirce ?

 

Recently BSE Ltd (BSE) came  out with Additional periodic price band (Here) for stocks exclusively listed on BSE.

Every Stock traded on stock exchange has a price band, wherein it can be traded for a particular day (Except for stocks in Derivative segment). But now BSE has put a Weekly / Monthly / Quarterly and Yearly  price-band on all stocks listed exclusively on BSE. It means the stock cannot move up by certain percentage in that time frame. The price-band is mentioned below.

Securities with daily price band as	Weekly   Price Band	Monthly Price Band	Quarterly Price Band	Yearly Price Band
20%	+/- 60 %	+/-100 %	+/-200 %	+/-400 %
10%	+/- 30 %	+/-60 %	+/-100 %	+/-200 %
5%	+/-20 %	+/-30 %	+/-60 %	+/-100 %
2%	+/-10 %	+/-20 %	+/-30 %	+/-50 %

Please note that there is no restriction on fall in price, The price can fall by 100 % i.e,  the fall n share price can be up to 0.00 in a year.

The Exchange quotes

"In order to enhance the market integrity and to prevent excessive price movement in the securities listed on its trading platform, BSE as a pre-emptive surveillance measure has an additional framework of periodic price bands in addition to the aforesaid daily price band framework. These additional periodic price bands shall be applicable to securities exclusively listed and traded on BSE Equity Trading Platform including securities listed on SME and SME ITP platform. The periodicity of these price band shall be weekly, monthly, quarterly and yearly"

The features of the additional periodic price-bands as per BSE are as follows

a) It is applicable only on Exclusively BSE listed stocks.

b) It will enhance market integrity.

c) It will prevent excessive price movement.

d) It is applicable to all stocks including SME and SME ITP platform.

e) It will help in surveillance mechanism on Exchange

f) Any up-move in S&P Mid cap Index will be adjusted in price-band by 2X

g) In-case of Corporate action, the price will be adjusted accordingly.

The added features cited by BSE are

a) It will reduce money laundering.

b) It may reduce volatility in such stocks.

c) It will reduce stock rigging.

d) They have also said that If there is upward change in daily circuit percentage of stock, the Additional price band will be increased, but if the circuit percentage of stock is decreased, the Additional Periodic price will remain the same. (Here)

But, There are many Drawbacks, which BSE needs to look after bringing in the additional price bands :

a) IT WILL DISTORT PRICE DISCOVERY : Additional periodic price bands will distort price discovery, because now, it does not matter, if the fundamentals of the company deserve to get re-rated on the higher side.

 

But if there is negative re-rating, the price can fall up-to 0.00 in a year.

b)  It will reduce volumes in such stocks : If the stock comes in the ambit of additional periodic price bands, It will be locked in upper circuit and thus it will reduce volumes in stock and also it will mean loss of interest by traders to trade in such stock.

c) Rise in Bid - Ask Spread : Such loss of Interest will also increase Bid / Spread in Stock, Which means such stock will have to pay liquidity premium.

d) Advantage for sellers : If the stock price reaches yearly price band, Then the price will not be able to move up, Hence it will compel the investors in such stock or some who can borrow such stocks, to go short on that stock as Price cannot not go up because of band for next 8-9 months. He can cover the position, when the price comes down. Also if he covers the short at the end of year, at same price, he will earn interest on money recd from short selling.

It will be more like Put option on stock, available at free of cost because of upper price band.

e) In-fact Gullible investors can be struck at circuit, waiting to sell at higher price and it may happen that they may not be able to sell the stock at higher price because of such bands.

f) Volumes will migrate to other exchange : Stocks which are listed on NSE exchanges does not fall under the ambit of Additional periodic price band, Hence Investors and Promoters will prefer listing on other exchange also, it may mean shift in volumes to other exchange

g) There are many stocks in price circuit limit everyday, but volumes can happen only at previous day circuit price of lower than that, The list will start getting bigger with time when many stocks will fall under yearly bands.

Some Things to Ponder for BSE

a) SEBI may have asked exchanges to find ways to curb money laundering  and Price Rigging on Stock Exchanges, But I don't think It is a proper way to curb money laundering or Price Rigging. Its just penalising all stocks for exchange incompetency. I am sure, Exchanges have resources to discover money laundering and Price Rigging by ways of Risk  management and also data mining. They have access to all order and trade data, KYC of Clients,  also they can ask for depository data. I am sure mining that data will lead not only to cases of Money laundering , price Rigging but also Front Running. Also new listing regulation can make Exchange more powerful in getting information from Companies also.

b)Why NSE has not put Additional periodic price Bands in place ?

c) Volatility is expected in trading, Exchange is not in business in reducing volatility, but they have put in place proper margin and Risk Management to take care of any eventuality. Volatility is because of uncertainty, Exchange can try only smothering  price discovery process.

d) Price of stock changes with change in Fundamentals and Sentiments. In a bullish scenario, if a company is doing well, Investors will buy the stocks, but if they are struck with price band and then there is change in sentiment ? 

e) SME stocks and SME ITP stocks are on different board, here exchanges may not have sufficient data on such companies, and it may be more difficult to bring in transparency in such stocks because of small size, but Main board has many more laws to keep tabs on company.

Additional periodic Price bands from the academic point of view :

a) Exchange has put in an additional impediment in price discovery process of stock. They have tweaked with market micro-structure, which is biased to sellers.

b) Many Stocks were transferred in PCAS (Periodic call auction) in the past, but SEBI had to later relaxed the criteria for PCAS stock, which meant most stock were out of the ambit of PCAS.

c) I am not aware if BSE has done some research work with the help of academician before implementing Additional price band. If at all, it is done, It can put it in public domain.

d)  Will Additional price band, compel companies to list on NSE, no matter if that means increasing compliance work. or Listing on NSE and doing away with BSE

e) Will Additional Periodic price band impact price discovery on upside ?

Looking at price and circuit data on BSE, I can pen few points 

a) BSE can enhance its surveillance to deal with price rigging, Money laundering and Front running. (In-fact it can take help of academicians and also NISM ( A initiative of SEBI) in dealing with huge data.

b) Exchange may lose volumes and more people will prefer to deal with stocks listed on NSE (Maybe many companies would then prefer to list only on NSE)

c) Investor may just watch rally in market and sit tight with stocks in circuit because of additional price band, later they may regret if there is change in sentiment.

d) BSE may keep additional price band for SME and SME ITP stocks and for others in the past they may reduce price bands to 2 %.

I guess BSE should not wake-up only after some high volumes stocks with institutional interest comes in Additional price Bands and they face wrath / Lobbying of such Institution. ( I guess Spicejet is nearing that level)

Till then on the softer side  " No Investor will be able to hold micro-cap Multibagger stocks in exclusively listed BSE stocks because of these rules "

I am highlighting this issues and this write up should be taken positively for my endeavor towards better price discovery and lesser Distortion of Prices in Market.

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

I welcome your critical comments and suggestions.

PS : I may have position in stocks or intending to take position in stocks falling under Additional periodic Price Band of BSE.

Revision in PriceBands on NSE Cash Markets and Derivatives Markets

NSE came out with a revised guidelines for Revision in Price bands on Stocks Where there are no Price bands. The Circulars are (Here) for Cash Market and (Here) for Derivatives Market.

As per new guidelines 

a) Circuit will be opened only after there are at least 10 trades at Circuit Price.

b) The trades should also be from multiple Unique Client codes (UCC) on both sides.

With this guidelines the dynamics of Price bands would change, There will be many more Market Micro-structure issues which will come in to play which can be detrimental to smooth price discovery process.

The various scenarios where Price Discovery would be impacted are

a) What happen If multiple trade takes place in cash and price moves up in cash segment and 10 trades does not take place in FO market because of higher price in cash.

b) If I put to buy /  Sell  100000 shares of XYZ at circuit, then as per the circular, The Circuit would not open the circuit till I get 100000 shares and then another trade takes place (Multiple trades on both sides with different UCC )

c) If there is an upper circuit in pre-open session, the cash price would go up at the open of market, what about FO market ?

d) When a new future contract is opened, It calculates fair price using Base Price, If there is a big difference in Base price and traded price then , would Exchange still not open the band ? (eg India VIX far week contract)

e) The circular specifically says that 10 trades at price above 9.9 % with multiple UCC, Do NSE have liberty to open the band over ruling this logic?

f) What if 10 trades takes place in BSE and Not in NSE or Vice- Versa ?

g) Also If Price in Cash Market goes up, But not in FO because of Band, Will Options Bands be opened ?

The basic intention of Exchanges for such circulars was to reduce stray / Outlier trades, and It is tough for Exchange to allow dynamic price bands and alsoreduce wrongs trades which are also detrimental to price discovery.

But NSE can opt to issue clarifications to reduce confusion and for better price discovery of prices.

I have sent a mail to NSE, highlighting this issues and this write up should be taken positively for my endeavour towards better price discovery and lesser Distortion of Prices in Market.

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.