Short sellers rode piggyback on the NMDC counter in the equity market. Many foreign institutional investors (FIIs) and high net worth individuals (HNIs) short sold NMDC shares on the stock exchange ahead of government's announcement of auction floor price for today's share sale in the company.
Short sellers made a neat cash pile by pocketing the price difference between today's auction price and the market price of NMDC last month, since they started short selling in the counter in the derivative segment.
It was widely anticipated by market players that NMDC offer for sale (OFS) will be priced at a substantial discount to its market price. This move of government was preempted by experts after the Oil and Natural Gas Corporation (ONGC) share sale fiasco and Hindustan Copper issue. Both the issues had to be rescued by state run banks and insurance companies due to aggressive pricing and lack of demand from large institutions.
The NMDC share price was trading between Rs 180- Rs 187 during the first week of November but witnessed a decline as the company was anticipated to be next in line of dis-investment issues. The share price fell over 15% in the past one month, even while the broader equity markets stood firm. Both the BSE Sensex and S&P CNX Nifty of the National Stock Exchange gained around 4.3% since November 1. The BSE PSU index, of which NMDC is a part, too rose 0.6% during the period.
"Majority of FIIs who subscribed to the issue today had short sold NMDC shares a few week ahead of the auction. This was the key reason why the share price of NMDC, which has thin floating stock in the market, saw a sharp fall," said a head of Mumbai based broking firm, from where large FIIs are known to take position.
Before today's auction, 90% of NMDC stake was held by the government and 6.22% was with the Life Insurance Corporation. Only, 0.66% stake was held by FIIs in the company leaving very little floating stock in the open market. However, NMDC is part of the derivative segment and traders can go short using futures and option instruments. Such short selling was noticed in ONGC too, which is why government had to once deferred the issue in September 2011.
After today's auction of NMDC shares, yet again interest was seen building up in the counter on the long side. Open interest in the NMDC call options between Rs 150- Rs180 was around 30 million. The share price of NMDC today closed at Rs 154.25 after it fell 3.17% from its previous closing price of Rs 159. The indicative auction price of NMDC today was Rs 149.23. Brokers and analysts have pointed out that NMDC at its current share price is trading at a steep discount to its global peers and far below its fair valuation.