Explained: Why Orchid Pharma surged 2000% and then crashed 70%

After the restructuring process, Orchid Pharma shares relisted on the bourses on November 3 last year. It closed at Rs 18 on the day of its relisting, and within five months, the price soared to a record-high of over Rs 2600.

There are hardly any public shareholders in the company. Previously, the paid up equity capital of the company was around Rs 88 crore, consisting of around 8.8 crore shares of Rs 10 face value each. Under the resolution plan, the equity capital was reduced by 99 percent to around Rs 40.8 lakh consisting of around 4.08 lakh shares of Rs 10 face value. These 4.08 lakh shares were given to banks by converting a part of their loans into equity.

With the new promoters infusing fresh funds in the company, their stake stood at a little over 98 percent. Effectively, public shareholding stood at less than 2 percent.

The company’s shareholding data for the quarter ended December 2020 showed that public shareholders held 7.85 lakh shares.

Yes. But that rule does not apply for companies relisting after debt resolution process.

When there are not enough shares available for trading, the price of the stock can be volatile.

They either rise sharply or plunge. In this case, the stock price soared.

Perhaps. But the trading volumes don’t seem to indicate that. When a stock rallies from Rs 18 to over Rs 2600 in just five months, many investors would have booked profits. According to data on the NSE, not a single trade in Orchid Pharma between November 3 and April 5 (when the stock hit a record high) resulted in delivery. Meaning, no shares actually changed hands. The buyers and sellers simply reversed their trades at the end of the day.

Strangely, on the BSE, every share traded during the same period—roughly 90,000 shares—resulted in delivery. But even this quantity seems low considering that technically, close to 8 lakh shares were available for sale.

The pricing of an OFS issue depends on the demand for that stock in the market, mainly what institutional investors are willing to pay. Just because the market price is high does not mean institutional investors will pay more than what they think the stock is worth. Remember, the company is making losses every quarter, and at current prices, has a market capitalisation of over Rs 3300 crore when annual sales are not even Rs 500 crore.

When a company issues shares to institutional investors under the qualified institutional placement (QIP) route, the issue price cannot be less than the average of the stock price in the preceding six months.

No such pricing rule is applicable for OFS. Promoters are free to price the issue as they like.

They would like a high price, of course, but eventually they will have to settle to what the market is willing to pay.

Maybe. But under the recently amended SEBI rules, companies that relist after the resolution process will have to have a minimum public shareholding of 10 percent within 12 months from the date of relisting. Since market conditions keep changing, achieving that target at one go at the last minute could turn out to be tricky.

The company having to price its OFS at a steep discount to market price was clearly a dampener. The OFS finally went through at Rs 451 per share and the current market price is Rs 827. Question is: why would anybody want to pay Rs 827 when smart money was not willing to pay more than Rs 451.

Also, following the OFS, the number of shares available for trading will increase. Because of the wide gap between the OFS price and the current market price, it is likely that many investors who have been allotted shares in the OFS will want to book profits. Given that the company’s fundamentals are in a poor shape, prospective buyers could be waiting for the stock price to settle before they jump in to buy.

Seems unlikely, but cannot be ruled out altogether. SEBI’s new rule requires that companies looking to relist after debt resolution process need have at least 5 per cent public shareholding.