Tata Steel's partly paid shares zoom six times from their March low

Issued under rights programme, they are now at a 14 per cent premium to ordinary shares

Betting on Tata Steel partly paid shares has turned out to be one of the most rewarding trade this year. From their March lows of Rs 29, the shares — issued in 2018 as part of its Rs 12,800-crore rights issue programme — have jumped six times.

On Tuesday, they ended at an all-time high of Rs 181 apiece, with a gain of nearly 4 per cent. Tata Steel fully paid shares, on the other hand, have risen 2.5 times from their March low of Rs 254.

The spread between partly and fully paid shares is now at a premium of nearly 14 per cent. In March, partly paid shares were available at over 70 per cent discount to the value of fully-paid shares.

So what explains such a huge rally? Partly paid shares are akin to buying a “call option” of Tata Steel but without an expiration date, say market experts. They carry a fourth of the value of fully paid shares. The call option date to buy the remaining three-fourths of the shares to convert them into fully paid shares hasn’t been fixed by Tata Steel yet. However, the price has been locked at Rs 615 per share.

In other words, those holding partly paid shares will be able to convert them into fully paid shares whenever the company fixes the call option date by paying Rs 461.25 — 75 per cent of the face value. Partly paid shares have 25 per cent face value of ordinary shares.

In March, when Tata Steel’s fully paid shares slipped to Rs 254, holding the partly paid shares was akin to committing that you would buy the fully paid shares at Rs 615. As a result, they traded at a deep discount. The situation has reversed now, as those holding the partly paid shares have the right to buy Tata Steel shares at Rs 615, even as the fully paid shares currently quote at Rs 635.

Abhilash Pagaria, analysts at Edelweiss, says the phenomena is similar to that of a deep-out-of-the-money option contract moving into in-the-money.

Partly paid shares act as high beta versions of their fully paid shares — they give outsized returns on the way up but also fall sharply on the way down.

Experts say if an investor has a firm believe that steel stocks will continue to gain over the next couple of years can consider investing in partly paid shares. “There is no arbitrage trade as of now and we can look for opportunities, if any, after the company announces the call date for the rest 75 per cent of the payment,” said Pagaria.

Tata Steel had launched its rights issue in 2018 following a sharp surge in its stock price between 2016 and 2017. However, after the rights issue, the stock hit a downward trajectory.

Shares of most steel companies have rallied sharply in recent months amid gains in the underlying commodity prices and an uptick in demand from China.