D-Street diary: Zee's options, Airtel rights, sucker bulk deal, promoters' arbitrage

Market watchers say SEBI should have a pre-market price discovery mechanism for REs as well, like there is for new listings.

As Zee’s promoters and Invesco slug it out in court, bulls in the stock appear to have retreated for the time being. Zee is being viewed as a potential rerating play by many, but prospective buyers are awaiting clarity on who will eventually get the reins of the company. As to how the stock is likely to fare in the short term, tracking the options contracts could offer some cues. In the week leading to Invesco’s letter to the Zee board seeking a change in the company’s management, there was a sudden burst of buying in out-of-the-money call options (200 strike price).

Quite a leap of faith on the part of the buyers, considering that the stock had been in a downtrend for more than three months. Sellers of those options looking for assured gains would have been crushed as the price of the options surged from around Rs 3 to Rs 64 overnight as soon as Invesco’s letter became public, and the stock rallied around 40 percent in a single session. Did the buyers know something that the rest of the market did not?

Operators in midcap stocks are said to be gradually offloading positions in some of the vulnerable names. With valuations becoming harder to justify, many midcaps will become illiquid overnight as soon as a correction hits. So the smart players are using the ongoing frenzy to make a quiet exit, ironically, by making a noise about it. The modus operandi is this: put a big block of shares for sale on the screen. That will make bulls nervous.

But soon enough, another buyer (an associate) will pick up the block. Newbies watching the trading screen will mistake this as a sign of strong demand for the stock. The next time a block is on offer, like mice drawn to cheese, they nibble at it, only to realise there is more where that came from.

Many of these recent entrants act in groups, as it helps them create momentum in small stocks. They are confident of having learnt all there is to the market. But as the Old Monk says: new investors will soon learn some very old lessons of the market.

With money pouring in at a rapid rate, many fund managers are at a loss as to how to deploy them, given expensive valuations. But not investing is an even bigger risk in this kind of a market.

Some of the smart fund managers are using fresh inflows to increase exposure to stocks that have a high weightage in their portfolios. If the stock happens to be midcap, the purchase bumps up the share price as well as the net asset value (NAV) of the scheme. A higher NAV means more investors showing up at the door.

Rakesh Jhunjhunwala’s purchase of Canara Bank shares last month is public knowledge as it is reflected in the bank’s latest shareholding data. But the stock also appears to have caught the fancy of the Silent Operator and his associates, who have been steadily buying it over the last month.

The mood for public sector banks, in general, has changed for the better as analysts are expecting a significant drop in the proportion of non-performing assets for the September quarter. But beware of leaping into any stock just because the big names of the market have taken a shine to it. Too many cooks can spoil the broth.

The rise of arbitrage funds has come as a blessing for promoters of many midcap companies who regularly dabble in their own stock. Arbitrage funds sell the futures of stock—which quote at a slight premium to the spot price—and buy an equivalent number of the underlying shares. This difference between the futures and cash market prices is the fund’s profit from the trade.

At expiry, the positions are reversed—futures are bought and the shares are sold. Turns out that some promoters sell shares from their benami accounts to such funds, and through their brokers take up a long position in futures, equivalent to the shares sold.

On the opposite side of the futures trade is the arbitrage fund. The promoter gets the full amount for the shares sold and needs to put up only 25 percent for the futures position. At expiry, the promoter and the fund agree to carry forward their positions to the next settlement cycle.

The fund gets its spread, the promoter gets his funds.