Power Finance Corporation’s Follow on Public Offer (FPO) at Rs 193 (5% discount from top end price of Rs 203) for Retail Investors…..Should one apply and Invest in PFC’s FPO ?….maybe an Arbitrage will interest you

This one’s for you Swaroop…you emailed me for a view on the PFC FPO

Power Finance Corporation’s  Follow on Public Offer (FPO) at Rs 193 (5% discount  from top end price of Rs 203) for Retail Investors…..Should one apply and  Invest in PFC’s FPO ? …Issue closes on May 13,2011

My sense is even Long Term Investors will be able to source PFC at Rs 175 levels in the Secondary Market….so this FPO did not stir me much….Even though  current Market Price of PFC is Rs 218 and above the top end price band of Rs 203,this may purely a deliberate market making to sail the FPO through…till I had a look at the strong arbitrage play here…more below

Does it make sense to buy in the Secondary Spot Now !?

Why would one buy at Rs 218 in the secondary market when one will surely  get a good,near full ,allotment in this Rs 4700 crs FPO at Rs 193 to Rs 203 !?…so clearly vested market making play is on to keep the counter lively and gainful to help the FPO to be successful…and this is a PSU…so you can guess where the directive is coming from !

Arbitrage Opportunity…IPO & F & O

This Window may have just closed as aggregate Open Interest Positions across exchanges has crossed 95% of the  Market Wide Position Limits (MWPL) for PFC….Check with your Broker …..PFC entering the Ban period will not allow further fresh shorts in F & O …..Only offsets will be allowed……Position will  reopen only when only  the aggregate OIs drop to 80% of the MWPL

So you can go ahead and apply in the FPO relatively safely if you plan to initiate shorts at higher than your assumed  FPO Issue Price of Rs 193,when operations are allowed in the F & O Segment

Perhaps one can short PFC in Futures at Rs 207-210…the range May 26/June 30/July 28 Futures closed on NSE today…Lot size is 1000 shares….and make one maximum application allowed in the retail segment of 980 shares at top end of Rs 203….there is a good probability for full allotment at a 5% retail discount…assuming price is fixed at top end of Rs 203  your cost will be Rs 193….that’s a straight Rs 14-Rs 16 spread…that’s over 7% returns locked inside a month !

You could take the Options route too if you wished…Buy a May 26 PFC Put (Lot size is 1000 shares) of Strike Price Rs 210 at Rs 6.60 premium or Strike Price Rs 220 at Rs 13.50 premium….net of premium (2% to 3%) your returns would drop to 5%….and here you are not subject to margins,like you would be in Futures   read more