Karnataka bank – private bank @ public sector valuation

(KKK) #21

Rights is issue has a huge discount. Existing investors may do a part booking too raise some cash and apply for Rights.

Equity may be diluted but I think its trading at a huge discount comparing to its peers. If bank reduces the NPA there might be good returns in this stock, I may sound biased because I am invested in this stock and will apply for rights issue.

(butun) #22

Why would a bank pay hefty discount and then promptly do rights issue to raise fund? Sounds oxymoron to me. In addition, they are not even disclosing why exactly they are raising fund. I am getting confused. Thanks Butun

(Sarthak Batra) #23

If this rights offer goes through, it offers an arbitrage opportunity.

Buy 4000 shares at CMP of Rs.139.25
Sell 1 lot(6000 shares) of October at CMP of Rs. 138.25

If the issue goes through, we will get the right to buy 2000 equity shares at Rs. 70.

138.256000 - (139.254000 + 70*2000) = +1,32,500

However, it is highly unlikely that market will provide such an arbitrage opportunity. The issue may face opposition from existing shareholders. Capital Adequacy Ratio of bank stands at 12.03%(Tier 1 + Tier 2), which means the bank is not in dire need of capital. Views invited.

Disclosure: Invested from 85-90 levels.

(chintri) #24

I think you are referring to an article published in ET. But it is not like that. There is nothing like arbitration in this case.

(Sarthak Batra) #25

This is risk-arb, not pure arbitrage. Correct me if I’m wrong.

(chintri) #26

https://t.co/38CWim8k3q This article is really funny … #economictimes needs to work on the quality of their articles…

(Sarthak Batra) #27

Article aside, is there something wrong with the calculation?

(chintri) #28

Yes follow the tweet neatly explained.

(Gaurav Agarwal) #29

To realize such a gain dont you need to execute the other side of trade?

Do you have any plan to square you short position in F & O and sell you share where you wish to take the delivery?

(chintri) #30

Why There Is No 66% Arbitrage With Karnataka Bank’s Rights Issue
By Deepak Shenoy - August 11, 20161609

There’s a little bit of confusion going around because Economic Times had published this article: (You can make upto 66% by participating in Karnataka Bank rights issue).

They mention that you could buy 4000 Karnataka Bank shares and short 6000 or the futures appropriately but also buy the remaining shares at 50% lower in the 2:1 rights issue announced recently. That would give you a fancy arbitrage.

This arbitrage doesn’t exist.

Because when such rights issues happen, two things change.

NSE adjusts the futures price downwards. So if you sold at 140, your selling price will be adjusted down so that it comes to Rs. 116. (Calculations later)
NSE increases the lot size appropriately. The 6000 lot would go to around 7200 shares per lot.
Open Demat Account at AngelBroking.co
Effectively, if you shorted 6000 futures of KTKBANK at 140, you would, post the record date, have a short of 7200 shares at 116 each.

The Calculations

Assume you have 2 shares of Karnataka Bank. You get 1 at Rs. 70 in the rights issue. NSE has an adjustment factor for the downward adjustment of the future price and upward adjustment of the lot size. See here for a recent example with GMRINFRA.

So if the price is Rs. 140, that means you invested Rs. 280 for two shares. You get one more share at Rs. 70. So you have invested Rs. 350 for three shares. That is Rs. 116.67 per share.

Therefore the price should fall to Rs. 116.67 per share. From Rs. 140. That’s a downward adjustment of 0.83333 on the futures price (adjusted 83% lower) and the lot size will be increased to 6000/0.8333 = 7200.

No arb in Karnataka Bank So in effect you don’t make any money in this “arbitrage”.

Just clearing out the confusion, since a lot of twitter traffic has erupted on this note.

(chintri) #31

Just copied and pasted from capitalmind.in

(Sarthak Batra) #32

@chintri Thanks, Somewhere in my mind I knew that such an opportunity can’t exist, wanted to clear the doubts.

(Sarthak Batra) #33

Hi @Gaurav_Agarwal
The short position initiated in October contract will be covered by delivering current holdings, however as @chintri pointed out, the lot size will change or the futures price will adjust accordingly.

(KKK) #34

All these calculation aside, KTK bank looks attractive currently specially when Bank Like RBL offer price is 225.

(Anand) #35

Anybody has an idea on the subscription figures of the rights issue?

(Vyshnav) #36

Vijay Kedia is piling it up again (feb17)

(butun) #37


That too after twitting this ^

(Vyshnav) #38

What surprises me is his 25cr personal investment and 10cr Kedia Securities investment in it, totalling 35cr

(butun) #39


Something that did not get as much notice but a good event nevertheless. Bharatbenz sold 14000 vehicles in 2015.

(Vshah198510) #40

Heard on the streets. Karnataka Bank to merge with Kotak Mahindra bank with swap ratio 5:1.
This is my first post. I might be wrong.
Can somebody confirm this?

If this ratio exists I believe we should buy this.
Can anybody suggest if is it worth a buy?

Disclosure: Not Invested.