BFBV Examination Question on Risk Arbitrage

Study the following exhibit:

Then study the document at the link below:

Public Announcement: Ispat Industries

Now examine the following three exhibits:

Ispat Industries Stock Price

0.01% Cumulative Redeemable Preference Share

Ispat Industries February 2011 Futures

Based on the above, answer the following questions:

  1. Identify the risk arbitrage (special situation) opportunity here. Explain it in detail by reproducing extracts from the documents provided to you. (20 marks)
  2. Would you borrow money to do this arbitrage? Why or why not? (10 marks)
  3. If you were a stockholder in Ispat Industries and wanted to continue to hold your shares because you felt that the future of this company is bright after JSW’s acquisition of its control, why would it still make sense to still sell them? What is the better alternative? Explain in detail. (10 marks)
  4. If you own shares in the company and do not wish to continue owning them, why does it not make sense to tender them in the open offer, assuming the offer was open today? What is the better alternative? (10 marks)

36 thoughts on “BFBV Examination Question on Risk Arbitrage

  1. L.J says:

    1. If i can buy the preference shares at Rs.9, then on conversion at Rs.19.85 per share, my effective price for the equity shares i receive will be Rs.17.865 per share. I can sell them in the futures for around Rs.23.70 per share and lock in the profit of around 33%. However, the time frame for the conversion is not given here.

    2. The conversion is subject to approvals. Even if the probability of getting the approvals is high, the time frame for the conversion is not known. This makes me apprehensive about using borrowed money to do the arbitrage.

    4. The offer price in the open offer is Rs. 20.54, while the share is trading at Rs.23.60 in the market. If i wish to sell, it would make sense to sell them in the market at the higher price.

  2. Ignatius Pinto says:

    1. Sell equity buy P1. The board of Ispat Industries has also approved to convert the existing 0.01% cumulative redeemable preference shares into equity shares at Rs. 19.85 per equity share subject to approvals including court approval. Currently these listed as P1 Series and are quote at 9.

    However, preference shares that are getting converted to equity (24,47,90,350) dont tally with any of CRPS numbers. 0,01% CRPS 48,59,08,844 shares dilution is not seen in the document. Pref. shares don’t tie up and hence question mark on the arbitrage.

    2. Definitely NOT borrow money although there is an upside buying P1 series from NSE and wait for conversion into equity share but the upside is not predictable. Since this is not going to happen before the Open offer is ending there is risk of the price of Ispat post open offer.

    3. Sell in the market rather than open offer; alternate would be to sell equity and buy P1.

    4. a. Current market price is higher than Open offer of 20.54.
    b. It is better to sell in the market and pay short term tax (or NO long term tax) instead of paying 20% tax on the profits because the open offer is through off-market.

  3. Ayush Mittal says:

    1. There is an arbitrage available by buying 19,850 preference shares at around Rs. 9.10 for each lot of future being sold at Rs.23.65. Thus there will a profit of Rs. 55,865 on investment of Rs. 1,80,635. The expected return is 31% per annum which is quite attractive.
    Such deals usually take 6 to 9 months. JSW being a strong and reputed company, there is a high probability of the deal getting completed successfully and in time.
    One should also consider the cost of carry and margin money for derivative (while shorting the future) – which would be approx 6%-9% if deal is open for 6-9 months.

    2. If the borrowing cost is say – 15% and cost of carry about 12% pa, then total cost becomes 27% pa. Arbitrage opportunity is of about 31% pa. Due to the time risk and lower margin of safety, borrowing should be avoided.

    3. Better alternative to remain invested is – sell shares in open market @ 23.60 and buy (1.985 times the qty) convertible preference shares @ 9.1. Hence also making a profit while remaining invested.

    4. Yes, the investor should sell his shares in open market as the rate there is much higher @ Rs.23.60 against Rs.20.54 in open offer. Also exemption of section 111A of Income Tax is available when STT is paid (that is the deal happens in open market).

    • Ayush, some comments on your post:

      1. You write that the expected return is 31% per annum. I think you meant the flat return is 31% and since you wrote that such deals usually take 6 to 9 months, your estimate of annualized expected return should be higher.

      2. When we use the word “expected” in the the phrase “expected return,” we must incorporate all scenarios including remote loss scenarios. So tell me what can go wrong in this deal, and more importantly, what will be the consequences of it?

      3. In your calculation of total cost, you have taken cost of carry of 12% p.a. That cost is paid by those who have a long position in the futures. This trade involves a short position.

      • Aman Jain says:

        Hi, a possible loss scenario apart from deal falling is that if the stock is removed from F&O then the hedge is lost, and the apparent almost risk-free profit position is open to loss of the entire invested capital.

        Another one could be a short squeeze prior to conversion of shares.

        • That’s good thinking Aman. I would assign very very low probability to the short squeeze risk because the preferred stock is a very small proportion of enterprise value and the stock is very liquid. The risk of short squeeze arises when the supply of shares dries up due to a corporate action (for example in the forthcoming buyback of Piramal Healthcare almost all the shares will be out of circulation thereby increasing the risk of short squeeze of short sellers) or when the floating stock (stock owned by non promoters) itself is very low. None of these conditions apply in the Ispat case.

      • Ayush Mittal says:

        1. Yes, meant 31% return but got misworded.

        2. The position may result in a loss if the deal gets cancelled. Before the announcement of the deal, the preference shares were trading at under Rs 3 and hence the price can go back to those levels if the deal is cancelled. Shorting futures won’t be a hedge in this case.

        The expected return could be lower due to time delays. There is a court process involved and it may take time.

        3. I was expecting that as this arbitrage will get discovered and as time gap reduces, cost of carry may come into play as more and more people may start shorting the futures. If the trend is downwards the farther month future contract may quote at lower price than the near month contract thus bringing in cost of carry/rollover.

        To reduce cost of carry, one may consider shorting preferably April month future instead of February future. For eg: As of today, there was a 15 paise premium in April month contract compared to Feburary contract. (Incase one finds April month contract illiquid, one may short March month contract)

  4. L.J says:

    @Ignatius: It tallies because the preference shares (of face value 10) will be converted to equity at 19.85 per share. so u’ll get one equity share for every 1.985 preference shares.
    48,59,08,844 / 1.985 = 24,47,90,350

  5. […] Sanjay Bakshi Ji has posted a very educative and practical special situation on his blog. The situation is related to JSW’s takeover of ISPAT Industries. Please read all the facts on his […]

  6. Some other thoughts:

    1. While calculating the open offer size, it is assumed that the preference shares have been converted. Does this mean that the open offer will be allowed to be open by SEBI only after the preference shares have been converted? If this is true (and I am not suggesting it is), what is the role of the short position in the trade? And if its not true, does one need a short position to protect oneself while the open offer is not yet closed?

    2. Who owns the majority of the preference shares?

    3. At the price of the preferred stock mentioned in the question paper, what is the effective cost of acquisition in the equity of the target company and how does that compare with the price paid by JSW for acquiring control?

    4. What was the fair value of the preferred stock before the conversion deal was announced and how did it change subsequently?

    • Taha says:

      1. The open offer is at the rate of Rs 20.54. Thus if the open offer is allowed to be open by SEBI only after the preference shares have been converted, protection against a decline in stock price would be provided at the level of Rs 20.54 (that too would be just a partial protection as the open offer is just for 20% of the stock). The role of the short position would be to increase this protection to the higher level of Rs 23.75 as mentioned in the question paper, thus increasing the spread of the arbitrage.

      2. Of the total 48.59 crore preference shares, 27.70 crore pref. shares were allotted by conversion of 40% of Ispat Industries’ equity into CRPS (at which time the promoters owned 54.48% stake in the company thus indicating a similar proportion in the ownership of the newly created CRPS), another 12.21 crore shares were issued to the shareholders of Ispat Metallics India Ltd, and another 8.68 crore pref. shares were issued to the promoters of Ispat Industries. All in all, a majority of the preference shares are owned by the promoters (presuming no selling by them subsequent to initial allotment).

      3. At the price mentioned in the question paper, the effective cost of acquisition in the equity of the target company would be Rs 17.865 per share, which would be about 10% lower than the price paid by JSW for acquiring control.

      4. The fair value of the preferred stock before the conversion deal was announced is hard to pin down. However, before the conversion was announced, the market was placing a valuation of upwards of Rs 3000 cr as the value of the company in excess of debt and preferred stock while the 0.01% pref. stock itself was selling for just 25% of its face value, despite its prior legal claim.

      I don’t know how many things I have inadvertently left out of the equation while arriving at the above conclusions..

      • Taha these are very good answers. Some observations:

        1. There is a price at which, while the open offer is not yet closed, you will square up your short position. What is that price? Why would you square up the short futures position?

        2. The fair value of the preferred was very low before the conversion intention was announced because that preferred stock was to be redeemed in 2017 (I think) at Rs 10 and carried a coupon of only 0.01% of par value per annum.

      • Taha says:

        Professor, I can’t seem to come up with the answer to point number 1 that you have raised…

        Also, as far as the fair value of the preferred is concerned, I was wondering if at the time of their creation they could have had some provision which said that they could be converted back into equity at the management’s discretion. I tried to get my hands on some documents of Ispat’s Scheme of Reconstruction & Amalgamation where the first tranche of the 0.01%’s were created but couldn’t find them. The instrument’s form, and their original conversion from the company’s equity all doesn’t seem to make too much sense to me.

        I was thinking maybe there could have been some clause somewhere that could have indicated them to be a good speculative purchase at 25% of face value, especially when JSW’s intentions initially came to light.

        Just a thought.

  7. Ninad says:

    A few thoughts

    1) The way I see it the open offer is incidental to this situation other than creating a floor price to the stock. The situation is betting on either the spread reducing between the preference price and the future price if the transaction gets delayed or completion of this transaction within the timelines.

    2) On whether the open offer can take place with this scheme pending, I would be surprised if SEBI gives a go ahead on the same. I think the Siemens open offer where there is a merger pending would be a good precedence to see if SEBI allows the offer to go thru which explicity states the rights of the preference holder to tender to the offer.

    3) There are 3 series of preference shares that are currently open. The scheme has chosen only one series of preference shares to be converted in equity and tendered as part of this takeover. I would assume that the existing promotors hold substantial part of these preference shares and are being provided a exit option as part of this transaction. If we assume that as a hypothesis, then I would presume it is in the interest of the promotor to enure that the scheme is approved before the open offer and JSW has nothing to lose by delaying the open offer.

    4) Risks in the transaction
    a) Time delay – The way I see the scheme, it would require court approval which would have its associated delays.

    b) Deal Risk – I dont perceive too much to the overall deal falling through but there could be a risk of scheme being dissolved if the underlying stock falls below the conversion price. Though there would be profit on the future position the underlying preference share could correct and the spread maintained.

    c) Price / Return Risk – I would assign a higher rollover cost than what Ayush has assigned if increasing number of ppl get into the trade and there is time delay in the transaction.

    • Good points Ninad. Do you think its in the interest of preferred stockholders to request SEBI to not let the offer proceed until the conversion is done? What arguments will go in favor of this idea? Are there any arguments which go against it?

      • Ninad says:

        There was no implicit convertion option in the underlying preference instrument. The convertibility of this specific preference series has arosen because of the deal and is one of the variables in the structure of the deal. In the Siemens open offer, one can argue that the merger process and the open offer are independent activities and are not derived from each other. However in this case the convertibility of the instrument has arosen bcos of the structure of the deal and I cant see how SEBI can ignore it and go ahead with the open offer. Prof, its the sperm syndrome where my brain has shut down and cant think of a counter arguement to this thought process.

        On whether it is in the interest of the preferred shareholder to let the offer proceed, I think the answer to this depends on what is the objective of the major preferred holder. Is it a back door route for the exisitng promotor to increase stake in the company in which case they would be agnostic about the open offer. If the objective is to tender these shares and encash then clearly they will push for the open offer.

    • Ignatius says:

      a. will SEBI check/question whether board has acted favourably only to 0.01% CRPS holders and not considered other 2 pref. shareholders interest?
      b. can other CRPS holders (10 and 12%) ask for exit out similar to 0.01% CRPS holders through court or SEBI?

      • In my view, SEBI has no jurisdiction in the matter of conversion of preference shares because that is done under the section 391 to 394 of Companies Act using a Scheme of Arrangement which requires board, shareholders, creditors, and high court’s approval but not SEBI’s approval. SEBI’s jurisdiction is limited to the matters dealing with the open offer made under the Takeover Code. So, while SEBI can’t, in my view, decide upon the conversion of one or all series of preference shares, it can decide to not allow the open offer to proceed until the proposed conversion has happened. One reason for this may be that the quantity of equity shares the acquirer (JSW) is offering to buy is calculated as 20% of expanded equity post conversion of preference shares. So, in a sense, if the offer is made to all the public equity shareholders of the target company and includes those future shareholders who now own the preference shares, would it not be right forSEBI to make the acquirer wait until the preference shares have been converted so that those new shareholders could also avail the offer? That’s the argument in favor. Is there an argument against?

      • Taha says:

        I think one argument against could be this. The notice says that the open offer is for “20% of the Fully Diluted Equity Share Capital as required under Regulations”. Now when one says that the regulations require the open offer to be 20% of the ‘fully diluted share capital’, technically it may be construed to mean that it is necessary only that securities with potential convertibility into equity exists as part of the capital structure to arrive at the calculation of 20%. In this narrow context, their prior conversion is not a necessity for them to be included in fully diluted share capital.

  8. Aman Jain says:

    Hi, Just wanted a quick check. i did go through the document, but could not find a mention that the company will issue 1 EQ share for every 1.985 P1 held…
    though if we assume that for the number of equity shares to be issued in conversion then the ratio comes out to 1.985. But why are we assuming that the conversion is not happening for the other types of preference shares?
    I would be thankfull if someone here could point me to the same.

    Thanks and regards

    • L.J says:

      The last sentence in the first exhibit states that the 0.01% preference shares are to be converted to equity. there is no mention of other preference shares.
      It also says that they will be converted to equity shares at 19.85 per share. So to get one share you have to hold Rs. 19.85 worth of preference shares. As face value of the P1 shares is Rs.10, it translates to holding 1.985 P1 shares to get one share. Clause 3 and 33 of the offer document also substantiate this as 24,47,90,350 equity shares will be issued in lieu of 48,59,08,844 P1 shares; the ratio is 1.985 P1 shares per equity share.

  9. Jigam GAndhi says:

    There is an Arbitrage opportunity in Ispat Industries. But The strategy is only to buy Ispat Preference shares and Carry it till conversion and Sell it after the conversion or after the date of conversion is declared.

    The rationale for taking such call is based on following points :

    a) There is a small probability that such conversion do not take place, but if you will look at share holding pattern of Ispat, The Mittals would hold around 22 % in the company after the shares are sold to JSW, The Mittals are Expected to hold26 % (Point at which they can Block any Special Resolution) only if they convert such preference shares in equity (Such move was done only to accommodate them)

    b) The Open offer price is 20.54 and the date of such open offer would take at least another 4 – 5 months, till that time there will be clearer picture on conversion of Preference Shares.

    c) We are not aware of the price moves of Ispat , It can move up and also come down. But we can take solace that there is open offer at 20.54 and Big stake in the company is sold at that price, such price can be benchmark.

    d) The price is ispat till the time of Open offer will not fall drastically even if there is a bear market because of arbitrage opportunity which may arise between cash price and open offer price.

    e) If the price of Ispat goes up, The price of Preference share will follow, but if you are short on futures, you will lose on opportunity cost along with cost of funding the MTM of Ispat futures.

    f) The Ispat preference share is more of a deep in the money call, where the Upside is unlimited and downside is limited , it is also very small because of open offer price.

    g) This a great arbitrage opportunity its peculiarity is lies in holding it naked rather than shorting the futures.

    i) I guess locking the profit will only be advisable after the date of conversion is declared or after the closure of open Offer (If there is no clarity on conversion of CRPS before that).

    As far as holders of Ispat are concerned, they can be advise d to sell shares and buy Ispat Preference shares.

    • Viraj says:

      Was just thinking on the downside:
      1) If Ispat share price increases (& Pref price doesn’t increase) then the margin money required for the same will increase leading to lower return on capital.
      2) What if Ispat is thrown out of F&O on revision of lists then i will be left unhedged. So I will never borrow for this trade. For me this is the biggest risk. (Just a remote possibility but a high impact outcome if the share price falls). As prof taught us remote possibility have be seen with the kind of impact they can make.

      • Good points Viraj. However, if there is a co-relation breakdown i.e. if the spot moves up (along with the futures) but preferred stock does not, then it will happen for either a very good reason (e.g. if the conversion deal is cancelled – can they do that given that its in the public announcement legal document?) or for a bad reason i.e. market inefficiency. In the former case, the trade will lose money, in the latter case, while there will be MTM funding required as you mentioned, the increased spread would make the trade even more attractive for arbs and should attract capital.

        As for your other risk factor, the risk of a stock being excluded from F&O trading is always there but one should examine the magnitude of that risk. The methodology of inclusion of stocks in F&O is there on NSE site and from what I remember, its very very unlikely that Ispat stock would be excluded from F&O trading. Even so, the reason why you don’t want to borrow for this trade can’t rationally be the possibility of the stock being excluded from F&O. If this were the case, then you would never borrow money to do a risk arb transaction because the probability of the stock being excluded from F&O is always going to be non zero. In my view, the reason why you would not want to borrow to do this trade is that its premature to fund it with borrowed money because there are many milestones to be achieved namely (1) Board Approval of Scheme of Arrangement; (2) Shareholders and Creditors approval of the scheme; (3) High Court’s Approval; and (4) Final implementation. Borrowing would make sense, in my view, only if at least Milestones (1) and (2) have been achieved provided of course the spread at that time is still lucrative.

        Also, of the two risks you mention Viraj, the one which can result in permanent loss of capital is the collapse of the conversion and not exclusion of stock from F&O. Both are remote scenarios but one can kill you and one can’t hurt you much (at least not at current price).

  10. sorry dear. I am not able to understand – My simple question is whether I should keep the 0.01 pref. share till it reaches 19.85 or should I sell now itself at the market price. If so, what is the best rate. Someone please help me by sending an email.
    thanks and best regards,

  11. Ankit Kumar says:

    have been following the discussion. I notices the offer opening date website on BSE as March 17 now. But there has been no update regarding conversion of the preferential. So, should the same be expected before the offer closes? or will that offer some time later? or will the preferential holders get another offer once their shares are converted?

  12. Joe says:

    Dear Sir,
    The latest corrigendum dated 14 March 2011 states that if they are unable to close the conversion process (into equity shares) before the expiry of 15 days from the closure of the open offer, then the open offer size while still remaining the same in number (64,72,38,458 shares) will then increase to 27.12% of the equity share capital (from 20% of fully diluted share capital announced earlier).
    It is unclear to me at this stage whether the conversion process stands cancelled should they be unable to complete it within 15 days of the closure of the open offer. Although I think the cancellation is unlikely, I am trying to understand the motivation behind today’s corrigendum. Perhaps they just want to get the open offer done with and not have it stalled or entangled with the conversion process. This would then lead me to think that they are therefore likely to take their own sweet time in initiating the conversion process.
    If however the conversion process does stand cancelled or is even postponed, it would mean that they are expecting nearly 50% of the existing shareholders (excluding preferential allotment) to tender their shares in the open offer. This is a significant increase from their earlier expectation of 30% of diluted shares (excluding preferential allotment). This increased risk of the open offer failing (expecting 50% vs 30% of the shares to be tendered) leads me to believe that it is in their best interest to close out the conversion process (thereby increasing the available number of shares for tender) before the closure of the open offer. Which then begs the original question – What was the real motivation in announcing the corrigendum today (27.12% vs 20%)?
    If my thinking is correct, would I be correct in assuming that the conversion process is not likely to be stalled and therefore the arbitrage opportunity (buy P1, short F&O) is now more safer to enter into?

    • The open offer and the conversion of the preferred stock are separate processes. However, the conversion is mentioned in the open offer document. This does not mean that the offer will be made to those new equity shareholders who received shares by having their preference shares converted. The conversion is a process governed by a “scheme of arrangement” under the Companies Act. This scheme is yet to be presented and approved by the board of directors, the shareholders and creditors, and the high court of Kolkata. No SEBI approval is required. In contrast, the open offer required SEBI approval, which has now been received.

  13. Ankur Jain says:

    A. ) Exclusion of Ispat from F&O : I think the risk of Ispat Industries being excluded from F&O is quite low . I checked the NSE methodology to include/ exclude stocks from the F&O list. For stocks which are already in F&O, there are 3 criteria to be met :

    1. Market wide position limit : For a stock to continue in F&O, Market wide position limit (average for last 6 months on a rolling basis) shall be equal to or more than 60 crs. Market wide position limit is the value of the closing price of the stock multiplied by 20% of the number of shares held by non-promoters. As of now, the total outstanding shares of Ispat Industries are 238 crs. JSW Steel holds 108 cr shares and Mittal Family owns 50 cr shares. Thus, the shares with the non-promoters are 80 crs. 20% of that is 16 cr shares and that multiplied with the current price of 22 gives a value of 352 crs which is far higher than the minimum requirement of 60 crs. Also, see the table below. On a rolling basis for the last 5 periods, the MWPL for Ispat Industries has been much higher than the minimum requirement of 60 crs.

    Period MWPL (crs)
    Apr 2010- Oct 2010 328.07
    May 2010- Nov 2010 291.38
    Jun 2010- Dec 2010 248.21
    Jul 2010- Jan 2011 337.43
    Aug 2010- Feb 2011 391.41

    What would happen if the open offer is 100% successful and all the 64.7 cr shares come in the open offer. In that case, the promoters (both JSW and Mittals) will have around 223 cr shares and the non-promoter shareholders will be left with only 15 cr shares. 20% of that is 3 cr shares and that multiplied with the current price of 22 gives a value of 66 crs which is very close to the minimum requirement. Any fall in the share price might make the stock susceptible to be excluded from F&O. But given that the offer price is at 20.54 and the current market price is 22, it is highly likely that the open offer will be unsuccessful and thus the number of shares with the non-promoters should remain large enough to keep the market wide position limit more than 60 crs. This assumption will be correct only if the stock does not fall much during the next 15 days so as to make the open offer unsuccessful.

    2. Quarter sigma : For a stock to continue in F&O, median quarter sigma order size (average for last 6 months on a rolling basis) shall be equal to or more than 2 lakhs. Calculation of quarter sigma is a slightly complicated process but the 2 main variables are : Trading volumes in cash and trading price. The trading volumes have been higher in this company historically given the large equity base and after the JSW deal, expectations of turnaround in Ispat have built in which should keep the interest in the stock to keep both trading volumes and the trading price high enough to satisfy the quarter sigma. Also, see the table below. On a rolling basis, for the last 5 periods, the Q-sigma for Ispat Industries has been much higher than the minimum requirement of 2 lakhs.

    Period Q-sigma (lakhs)
    Apr 2010- Oct 2010 41.10
    May 2010- Nov 2010 38.38
    Jun 2010- Dec 2010 39.46
    Jul 2010- Jan 2011 48.18
    Aug 2010- Feb 2011 60.95

    3. For a significant part of the month, there should not be any ban on creating a new position in F&O for that stock.

    If any stock doesn’t meet these criteria for 3 consecutive months, it’s exclusion from F&O is recommended.

    B) Deal risk: After the open offer has been cleared by SEBI ,the offer is slated to open tomorrow. The risk of the deal falling off between the two parties now is virtually zero. The preferential allotment of shares to be issued to JSW Steel was approved by the shareholders on Jan 18, 2011. Since then, the shares have been issued to JSW Steel and the same have been listed on the stock exchanges as well. Though it was clear that the lenders have been instrumental in this takeover but after the open offer has been approved by SEBI, it becomes crystal clear that the lenders do not have any objection to the deal including the conversion of 0.01% CRPS into equity shares at Rs 19.85 per share. Clause 45 of the public announcement of the open offer states this as one of the approvals required for the open offer “ Consent is required from financial institutions and banks who are lenders of the Target (Ispat Industries) for the proposed substantial acquisition of shares”.

    C) Risk of change in the conversion terms of CRPS : This risk again is minimal owing to the explanation in the earlier paragraph. The other two series of preference shares (10% and 12%) were issued to the lenders under a CDR process. One risk was that 10% and 12% CRPS holders might ask for the conversion into equity shares as well. Since the lenders have approved this transaction and the open offer, any objection from the lenders now on the conversion of 0.01% CRPS is again virtually zero.

    D) Time Delay risk : For the conversion of preference shares into equity shares, approvals from the shareholders and the High Court of Kolkata will be required. I believe that after the open offer is completed, there could be swiftness on the company’s part to start the process of conversion of preference shares. In my view, the process of conversion of preference shares can be completed in 8 months from now. We know that the registered office of JSW steel is in Mumbai. Ispat’s registered office is in Kolkata but the corporate office of Ispat is in Mumbai. Now with JSW directors also sitting on the board of Ispat Industries, they will have to travel to Kolkata for any meeting that is organised. Practical solution will be to shift the registered office of Ispat Industries to Mumbai. That will also ease the day to day administration of the company. It will also lead to lowering of costs of running a separate office in Kolkata which might not be required at all. If the registered office of Ispat Industries is shifted before the scheme of arrangement for conversion of CRPS is initiated, the scheme will be heard in the High Court of Bombay. Secondly, only a postal ballot is sufficient to shift the registered office of a company.

  14. Ankit Kumar says:

    Hello Sir,
    the P1 seems to be falling by a percent or 2 everyday for over a week now. It seems that there is some kind of informed selling happening, may be, the scheme is cancelled and the insiders have started selling.

  15. Ajay Garg says:

    Dear Sir,

    Had just kept the stock under watch after reading the post and in the last few days the potential return from the idea has jumped up to as high as 45-50% … is there something we are missing OR is it too good to be ignored ???? Maybe along with you Ankur can enlighten us as well ….


    • Ajay, I don’t know. The arb was not riskless. That’s why its called “Risk Arbitrage” This is the beauty of security analysis. You are never going to have complete information. If the deal happens, the opportunity is great. If it doesn’t happen, it will result in losses. So when you lay out cash in a deal like this, you have to factor in the consequences of the deal not happening. People lose out big time in deals that don’t work out because they put too much money in them. Overconfidence and Position Sizing go together…

  16. Amit Mehta says:

    HI Sir

    The spread for this trade has widened in the last few days and am wondering what the reason could be. One thought that comes to my mind is that given that JSW is now the promoter conversion of preference to common may not be in their interest and they may actually try to scuttle this leg of the deal..or atleast delay it. Any thoughts on this?

  17. Vince Garu says:


    Ispat industries seems to have fully redeeemed the 10% cunulative preference shares.
    It looks like 0.01% preference shares are a good option at CMP , considering that thery are looking at redeeming other type of shares.So, the conversion might not be far away.

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