The share price of Rural Electrification Corporation (REC) rose 5 per cent today on huge short-covering.
Officials at leading broking firms said high net worth individuals (HNIs) and some foreign institutional investors anticipated confirmed allotment of shares in the company’s follow-on public offer (FPO) on expectation the issue would get a poor response. So, they sold shares in futures and cash segments and applied for shares in the FPO, taking the price differential as profit. But oversubscription in the qualified institutional buyer (QIB) portion by 5.5 times and the HNI portion by two times put paid to their plans.
“There was short-covering by HNIs and foreign institutional investors. People had also been short in the cash market, anticipating confirmed allotment,” said Sailav Kaji, director (institutional equity), Fiduciary Euromax. He said due to this short-covering, the discount in REC’s March futures contract had narrowed.
On the National Stock Exchange, the stock closed at Rs 222.05, up 4.4 per cent, while the March futures contract closed at Rs 215.65, 2.9 per cent less than the spot price.
The floor price for the issue was Rs 203. Retail investors and HNIs will get shares at this price. Traders were expecting that the market price would fall due to the poor response to the issue. However, they had to cover short positions, as the institutional portion was hugely oversubscribed at Rs 206 per share.
Bidders in the HNI category, expecting full allotment, may be dejected as the category has been subscribed over two times.
As the retail segment has been under-subscribed, the unsubscribed portion may be allotted to institutional bidders.
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Some investment bankers associated with the FPO said HSBC had put in bids worth Rs 1,000 crore at Rs 206 a piece. Many of the global funds bid higher than local institutions.
The break-up showed that bids for 191.6 million shares were received in the QIB category at over Rs 205. There are only 85.7 million shares on offer in the category. Even if the unsubscribed retail portion (46.2 million shares) is allotted to institutional bidders, LIC is unlikely to get any share.