Doctor Prof IND ral student, In fessor, IIM C IAN INSTI W Specia

Transcription

INDIAN INSTIITUTE OF M
MANAGEM
MENT CAL
LCUTTA
W
WORKING
ERIES
PAPER SE
WPS No. 659/ July 20010
Speciaal Situation Arbitrage: 5 Caselets
by
P. Srik
kant Ayyar
Doctorral student, Inndian Institu
ute of Managgement Calcutta, Joka, D
Diamond Harrbour Road,
Kolkaata 700104
Vibh
hor Gupta
UBS Securities
Ram
ma Seth
Proffessor, IIM Calcutta,
C
Diaamond Harbbour Road, Joka P.O., Koolkata 700 104 India
&
Prerak Vohra
ng
McKinseey Consultin
Special Situation Arbitrage: 5 Caselets
P. Srikant Ayyar1
Vibhor Gupta2
Rama Seth3
Prerak Vohra4
Indian Institute of Management Calcutta
July 2010
1
IIMC, srikantp09@iimcal.ac.in
UBS Securities, vibhorgupta@gmail.com
3
Corresponding Author, IIMC, rama_seth@iimcal.ac.in
4
McKinsey Consulting, prerak33@gmail.com
2
Contents Preface........................................................................................................................................ 7 Motivation .............................................................................................................................. 7 Case Selection ........................................................................................................................ 7 Introduction ................................................................................................................................ 8 Definition of Merger Arbitrage .............................................................................................. 8 How does Merger Arbitrage Work? ...................................................................................... 9 Empirical Findings on Merger Arbitrage Strategies ............................................................ 10 Are Profits Guaranteed? ....................................................................................................... 12 Methodology ............................................................................................................................ 12 Data Collection .................................................................................................................... 12 Analysis................................................................................................................................ 13 ICICI’s Partly Paid Securities .................................................................................................. 14 Introduction .......................................................................................................................... 14 Motivation for the Issuance ................................................................................................. 14 Offering and Subscription Details ....................................................................................... 15 Motivations for Issuing Partly Paid Securities..................................................................... 16 Tata Motors Differential Voting Rights ................................................................................... 28 Introduction .......................................................................................................................... 28 Funding of the Acquisition .................................................................................................. 28 Details of the Rights Offering .............................................................................................. 30 Post- Issue Performance ....................................................................................................... 30 Ranbaxy Acquisition by Daiichi Sankyo ................................................................................. 42 Introduction .......................................................................................................................... 42 Execution of Arbitrage ......................................................................................................... 42 Understanding Futures Movement....................................................................................... 43 RIL RPL Merger Deal ............................................................................................................. 50 Introduction .......................................................................................................................... 50 Calculating Market Implied Probability .............................................................................. 50 Inaccuracy of Market Implied Probability ........................................................................... 50 Novelis Acquisition by Hindalco ............................................................................................. 57 Introduction .......................................................................................................................... 57 Strategic Rationale for the Deal ........................................................................................... 57 Deal Structure ...................................................................................................................... 58 Arbitrage Opportunity .......................................................................................................... 59 Corus Steel Acquisition by Tata Steel ..................................................................................... 63 Introduction .......................................................................................................................... 63 Strategic Rationale for the Deal ........................................................................................... 63 Deal Structure ...................................................................................................................... 65 Arbitrage Opportunity .......................................................................................................... 65 Teaching Notes ........................................................................................................................ 72 ICICI Bank Partly Paid Issue ............................................................................................... 72 Suggested Questions ........................................................................................................ 72 Hypothetical Evolution of the ICICI Bank Case ............................................................. 73 Simplified profit/loss calculations ................................................................................... 77 Tata Motors DVR Issue ....................................................................................................... 79 Suggested Questions ........................................................................................................ 79 How the case unfolded ..................................................................................................... 79 Theoretical background as per behavioral finance: ......................................................... 81 Ranbaxy-Daiichi Sankyo Deal............................................................................................. 84 Suggested Questions ........................................................................................................ 84 Discussion Material ......................................................................................................... 84 Novelis-Hindalco Deal......................................................................................................... 86 Suggested Questions ........................................................................................................ 86 Discussion Material ......................................................................................................... 86 Tata-Corus Deal ................................................................................................................... 87 Suggested Questions ........................................................................................................ 87 Discussion Material ......................................................................................................... 88 Bibliography ............................................................................................................................ 90 Data Sources ............................................................................................................................ 90 Exhibits EXHIBIT A: ICICI .................................................................................................................. 18
Exhibit A1: Economic trends .................................................................................................... 18
Exhibit A2: Balance Sheet for ICICI Bank Limited ................................................................... 19
Exhibit A3: Income Statement for ICICI Bank Limited ............................................................ 20
Exhibit A4: Bond Issuance activity of ICICI Bank .................................................................... 20
Exhibit A5: Equity Issuance activity of ICICI Bank .................................................................. 23
Exhibit A6: Issue Prospectus..................................................................................................... 24
Exhibit A7: ASX Press Release on Partly Paid Securities ........................................................... 25
Exhibit A8: Historical Data ....................................................................................................... 26
EXHIBIT B: TATA MOTORS ................................................................................................ 31
Exhibit B1: Balance Sheet ......................................................................................................... 31
Exhibit B2: Income Statement .................................................................................................. 32
Exhibit B3: Cash Flow Statement .............................................................................................. 33
Exhibit B4: Terms of bridge loan (summarized) ........................................................................ 34
Exhibit B5: Shareholding Pattern at the time of issue ................................................................ 36
Exhibit B6: Offer Document .................................................................................................... 37
Exhibit B7: Daily Share Prices ................................................................................................... 38
Exhibit B8: Pricing Rights ......................................................................................................... 39
Exhibit B9: Differential Voting Rights Price History ................................................................. 40
EXHIBIT C: RANBAXY ......................................................................................................... 45
Exhibit C1: Key developments during the deal period ............................................................... 46
Exhibit C2: Evolution of Ranbaxy Shareholding Structure ........................................................ 48
EXHIBIT D: RIL-RPL ............................................................................................................. 52
Exhibit D1: RIL Press Release .................................................................................................. 52
Exhibit D2: JM Financial Deal Memo ....................................................................................... 54
EXHIBIT E: NOVELIS ........................................................................................................... 60
Exhibit E1: Market data trends.................................................................................................. 60
Exhibit E2: Key developments during deal period .................................................................... 62
EXHIBIT F: CORUS STEEL .................................................................................................. 67
Exhibit F1: Acquisition Financing ............................................................................................. 67
Exhibit F2: Timeline of events during the deal .......................................................................... 70
Exhibit F3: Stock Price Movement............................................................................................ 71
Figures Figure 1: Risk Return Characteristics in Merger Arbitrage ..................................................... 11
Figure 2: ICICI Partly-Paid Securities - Spread and Volume .................................................. 17
Figure 3: Historical Stock Price Movement of Ranbaxy ......................................................... 44
Figure 4: Difference between 1 and 2 month Futures Prices for Ranbaxy .............................. 45
Figure 5: Stock Price Movement - Rabaxy and Daiichi Sankyo ............................................. 45
Figure 6: 1 Month Futures Price Movement and Key Develpments for Ranbaxy .................. 46
Figure 7: Evolution of Trading Positions in RIL-RPL Deal .................................................... 50
Figure 8: RIL RPL Swap Ratio ................................................................................................ 51
Figure 9: RIL and RPL Stock Price Movement ....................................................................... 52
Figure 10: Regions of Integration and Segregation of Two Different Outcomes by an Investor
.................................................................................................................................................. 83
Figure 11: Ranabaxy Profit/Loss Evolution on a Per Share Basis........................................... 84
Figure 12: Profit/Loss Evolution from a Hedged Ranbaxy Position ....................................... 85
Figure 13: Profit/Loss Evolution on a Per Share Basis of Novelis .......................................... 86
Figure 14: Novelis Trading Volumes in the US and Canadian Markets ................................. 87
Figure 15: Profit/Loss Evolution on a Per Share Basis – Corus .............................................. 88
Tables Table 1: ICICI Bank's Equity Issuance .................................................................................... 15
Table 2: ICICI Subscription Details ........................................................................................ 16
Table 3: Tata Motors Shares Outstanding if Rights Issue Fully Subscribed ........................... 30
Preface Motivation Building a successful arbitrage position requires a trader to know the details of the deal such as
the parties involved, their incentives and motives, and where possible, their commitment to the
deal. It also requires an ability to collate existing information, understand the data and ascertain
likely outcomes.
The cases in this compendium have been developed by our team to explain how typical
arbitrage situations would evolve and what kind of input and analysis would be required to
make trading in them profitable. The idea is that the readers of the cases view the situations
described from the point of view of an arbitrage trader.
The idea of many caselets rather than one case is that it would expose students to a range of
special situations, and let them develop a stylized understanding of a class of situations and
the ability to analyse unseen variations as presented in the real world. The information
gathered and the theories explained here provide the requisite tools to allow students to
understand and appreciate the nuances involved in merger arbitrage.
Case Selection We selected cases in risk arbitrage that were recent, interesting (in the sense that there was a
unique learning in each of the situations) and that were novel and hitherto unpublished. This
selection was partially enabled by drawing on the knowledge of some of the team members. We
confirmed the selection after discussions with various market participants active in equity
research, brokerage trading and principal trading.
We discuss six situations, each of which give insights into the behavior of market participants.
We present these caselets in a structured way, analyzing how publicly available information may
be used to implement trades and manage positions. We present below a brief introduction
highlighting the uniqueness of each case.
1. ICICI bank issue: This issue was a fund raising event rather than an M&A situation. The
opportunity for arbitrage was present due to the issue having a clause for part payment
for select investors.
2. Tata Motors issue: This issue was an unprecedented financing situation in India, where the
company created a shareholding structure with differential voting rights. The market’s
pricing of control vs. cash flows was different between the two classes of stocks
3. Ranbaxy-Daiichi Sankyo deal: This deal involved a less than 100% open offer for the public
shareholders and hence carried significant uncertainties regarding the acceptance ratio.
There were also uncertainties about the deal closure date due to regulatory hold ups.
These uncertainties created arbitrage opportunities.
4. RIL-RPL deal: As opposed to other M&A situations discussed here, this deal entailed a
pure share swap where the expected profitability depended on the movement of the price
ratio of the two stocks.
5. Hindalco-Novelis deal: This deal was a straight cash bid. What made it unusual was the
differential price movement in two markets. Novelis was listed in both US and Canada
and the trading volumes in Novelis stock reacted very differently to deal announcement
in the two markets. We conclude that this behavior reflected the presence of arbitrageurs
in one market but not the other.
6. Tata-Corus deal: The announcement of this deal led to a bidding war between various
suitors. The market had certain expectations about the possibility of a bidding war but
the unfolding of the situation led to a revision of these expectations amongst market
participants. The result was a series of interesting price movements that arbitrageurs
could use to their advantage.
Introduction Definition of Merger Arbitrage Merger arbitrage involves trading the stocks of companies engaged in mergers and takeovers.
The arbitrage does not denote the practice of trading on speculation about a possible
announcement of an M&A transaction; rather the trades are executed only after a definitive
agreement is reached. If all goes as planned, the target company's stock price should eventually
rise to reflect the agreed per-share acquisition price, and the acquirer's price should fall to reflect
what it is paying for the deal.
The opportunity for arbitrage arises before the consummation of the merger and once the terms
of the potential merger become public. It is then that an arbitrageur will go long, or buy shares
of the target company, which in most cases trade below the acquisition price. At the same time,
the arbitrageur will short sell the acquiring company (in case of full or partial share swap) by
borrowing shares with the hope of repaying them later with lower cost shares. The wider the
gap, or spread, between the current trading prices and their prices valued by the acquisition
terms, the better the arbitrageur's potential returns.
How does Merger Arbitrage Work? A merger arbitrage opportunity is created when a probable event occurring in the future, i.e. the
consummation of a merger, renders the pricing of the shares of two companies in proportion to
each other. However, after the announcement of a merger, the shares do not trade exactly at
prices as per the relationship implied by the terms of the deal; they trade disparately.
This disparity exists because the consummation of a merger is not a certain event and the
disparity is proportional to the probability that the merger falls through. Thus, the arbitrage is a
risky one where the arbitrageur is holding the event risk of deal failure. There are also other
components of risk which exist in this strategy, which we shall relegate to a later discussion.
To elaborate this supposition, let us consider an example of a hypothetical merger deal:
Company X announces its intention to buy company Y in a share swap of 2:1 (i.e. 2 shares of X
per share of Y). Assume that X traded at 50 and Y at 75 before the announcement and that
immediately after the announcement X’s price goes down to 45 and Y’s prices rises to 85.
The example illustrates that the shares do not trade as per the relationship implied in the share
swap, that is: Price(Y) = 2* Price(X). This is because the market is cautious about the completion
of the deal. The degree of skepticism will be reflected in the relative gap in pricing. We discuss
this aspect next.
If the merger were to go through, 2 shares of X would be equivalent to 1 share of Y. Hence, a
merger arbitrageur who is essentially betting on the deal being consummated exploits this mispricing by buying one share of Y for 85 and shorting 2 shares of X for a cash inflow of 90. Upon
the completion of the deal, one Y share will be exchanged for two X shares which will be used to
cover the short sale. This strategy provides a net profit of 5 (ignoring the net interest earned on
short sales for now) for a holding period beginning at the announcement of a deal and ending at
its closure.
However, if the merger fails, then, assuming no externalities, X should again trade around 50 and
Y around 75. In this case, the loss on the arbitrageur’s position would be 20 (-85 + 90 + 75 –
100) when he unwinds his position.
We can find the market determined probability of completion of the merger as indicated by the
pricing of shares by the market. If we assumed that arbitrage profits are on an average zero (i.e.
expected profits are zero), then:
p*5 – (1-p)*20 = 0 => p = 80%
In practice, expected arbitrage profits are not zero because the market prices in a lower
probability to successful deal closure in mergers than is experienced in reality.
Empirical Findings on Merger Arbitrage Strategies Prevailing research suggests that financial markets exhibit systematic inefficiency in the pricing of
firms involved in mergers and acquisitions. It documents excess returns in cases of successful
deal closures for arbitrage positions taken following the announcement of the deal.5
The following figure displays a representative picture of the losses and gains from risk arbitrage.
This figure tracks the median arbitrage spread (the percentage difference between the target's
stock price and the offer price) over time, measured from the deal resolution date. For unsuccessful
deals, the spread remains relatively wide during the life of the merger. When a merger deal fails,
the median spread widens dramatically, increasing from 15 percent to more than 30 percent on
the termination announcement day. A much different pattern exists for risk arbitrage
investments in successful merger transactions. In successful deals, the arbitrage spread decreases
continuously as the deal resolution date approaches. Upon successful consummation of the
merger, the spread collapses to zero. The fact that spreads are much wider for unsuccessful
transactions suggests that the probability of deal failure is incorporated into the stock prices of
target firms.
5
Mark Mitchell, Todd Pulvino, ‘Characteristics of Risk and Return in Risk Arbitrage.’ The Journal of Finance,
Vol. 56, No. 6 (Dec., 2001), pp. 2135-2175
Figure 1: Risk Return Characteristics in Merger Arbitrage
There have also been empirical studies6 of the actions of risk arbitrageurs in takeovers. Their
hypothesis is that merger arbitrageurs are better informed than the market about the takeover
probability of success. Findings suggest that takeovers in which arbitrageurs bought shares have
an actual success rate higher than the average probability of success implied by market prices. As
a result, they can generate substantial positive returns on their portfolio positions. Other
researchers have argued that this result is indistinguishable from one where merger arbitrageurs
do not know ex-ante which takeover attempts are more likely to be successful, but their presence
increases the probability of success, since they are more likely to tender.
In practice, carefully structured risk arbitrage positions are executed by large institutional
investors who often have knowledge of probable actions of a subset of other arbitrageurs.
Hence, the size of positions taken by merger arbitrageurs is endogenously determined and the
resulting impact on the probability of successful merger follows from the discussion above. The
market will continue to under-estimate this probability of success as long as the arbitrageurs
manage to not fully reveal their presence in the share-holding structure of the involved parties.
Similar studies also establish a positive relationship between trading volume and the probability
that the takeover is successful. This is consistent with the widely observed phenomenon that,
after the takeover announcement, both the stock price and the transaction volume of the target
rise tremendously relative to their preannouncement levels.
6
Cornelli and Li, 2002, show that since arbitrageurs are more likely to tender, their presence in the market
endogenises the value of the target shares.
Are Profits Guaranteed? This arbitrage would be risk-less only if the merger is certain to be completed, since the pricing
disparity can be locked in now and unwound later for profit. If all mergers in all situations were
priced correctly, then profits from disparities in pending mergers that are eventually completed
should balance losses from those in mergers that are eventually busted.
However, as discussed above, the mis-pricing exists systematically and hence, such trades are
profitable. It can also be seen from the preceding discussion and from Figure-1 that the profits
are not guaranteed. In situations where the merger falls through, the losses can be far larger than
the possible gains accruing from successful consummation of the deal.
For this reason, merger arbitrageurs build a portfolio of such positions which are aimed to
exploit the statistically profitable nature of the trades without depending fully on one or a small
number of deals. Such portfolios can be churned based on manager’s discretion or through a
strictly rule based (automated) system of trading with minimal subjective intervention.
Methodology Data Collection The building of each case required extensive qualitative and quantitative data collection and
hence we referred to multiple sources for gathering data. We collected data from primary sources
(i.e. market participants) and various secondary sources, which we note below:
1. Bloomberg: used for prices, volumes and corporate action details regarding various
instruments and companies
2. Reuters: used for market news about the companies as each of the situations progressed
3. Company annual reports
4. Company websites
5. Academic articles on risk arbitrage
6. Corporate investor relation departments of the companies involved
7. Traders, merchant bankers & brokers for the deals
8. Various other news and media article sources including Hindu business line and Wall
Street journal (Livemint)
Analysis The data gathered was structured to present a logical story of developments and to emphasize
the diverse and widespread nature of sources from which information needs to be gleaned by an
arbitrageur when he/she decides to setup a trade.
The simulated profit and loss charts from hypothetical arbitrage positions are included in the
exhibits of the cases. From the data gathered, we also calculated the market implied probabilities
of deal consummation which is an important parameter to monitor in special situations risk
arbitrage.
ICICI’s Partly Paid Securities Introduction On May 2 2007, ICICI Bank, a leading private sector bank in India, detailed plans to raise an
additional USD 5 bn ( 20,000 cr7 INR8 ) by selling additional shares to the public. The plans
came in the wake of a disappointing earnings release on April 30, along with which it announced
that it would seek around $5bn in equity capital. Markets reacted negatively to this news, and the
stock dropped over 7% amid concerns on dilution.
The Industrial Credit and Investment Corporation of India Limited (ICICI Limited) was
incorporated in 1955 with the backing of the Government of India, the World Bank, and Indian
industry to promote India’s economic development by providing medium to long term project
financing to Indian business. In 1994, ICICI Limited established a banking subsidiary (ICICI
Banking Corporation, later ICICI Bank Limited) to engage in banking operations including
taking deposits. Years of rapid growth saw the ICICI group becoming India’s largest private
bank, and venturing into the securities business. In 2002, the group integrated its financing
banking operations through a reverse merger, in which ICICI Bank took over ICICI Limited and
other group companies. ICICI Bank continued to grow as India’s economy, after decades of
modest growth, grew rapidly at 8-9% in real terms each year between 2003 and 2007. By March
31 2007, ICICI was India’s second largest bank, with total assets of Rs 3950 bn (USD 99 bn) and
profits of Rs 26.3 bn (USD 660 mn).
Motivation for the Issuance In order to fuel the burgeoning growth of assets in its book, ICICI Bank had repeatedly accessed
both domestic and international debt markets in the 5 years preceding the issue. ICICI Bank
diversified its borrowing into in foreign currencies and experimented with innovative financing
schemes. A summary of ICICI Bank’s capital raising activities for the preceding five years is
presented in Exhibit 4.
Nonetheless, from a regulatory perspective, the core measure of a bank’s financial strength is its
equity capital. The Basel-II capital adequacy norms adopted in 2004 follow this philosophy, and
focus on a bank’s Tier-I capital ratio, which is defined as the ratio of a bank’s core equity capital (
7
A crore is a unit equivalent to 10 million.
On March 31 2007, the USD/INR exchange rate was Rs. 43. For convenience, Rs. 40 has been used
throughout the case for currency conversions. The actual exchange rates are presented in Exhibit I.
8
common stock + reserves ) to its total risk weighted assets. Therefore, in parallel with bond
issues, ICICI had also sought to shore up its equity (Exhibit 5 ) by raising approximately USD
565 mn ( 2,260 cr INR ) and USD 2.5 bn ( 10,000 cr INR ) in 2005. To diversify its share
holding structure and encourage participation, domestic retail shareholders received a 5%
discount to the issue price of the 2005 offering.
Table 1: ICICI Bank's Equity Issuance
Year
Approx shares in millions
Issue size in ADS
Approx USD
(incl. ADS equivalents)
relative to US issue size
Notional
2004
166.37
33%
1.3 bn
2005
153.53
38%
2.0 bn
2007
195.76
92%
4.9 bn
As can be seen from Table I (last column), the proposed 2007 issue was larger than the previous
issues made by the bank, both in terms of the number of shares and in value; the latter
remarkably so since the share price had appreciated considerably. This was also a consolidated
capital raising exercise – while ADRs were around 35% of the past 2 issues, the 2007 issue
sought equal amounts from domestic and international capital markets. The stated purpose of
the issue according to the offer documents was to augment the bank’s capital base to meet future
capital adequacy requirements arising out of growth in its businesses and for other general
corporate purposes. Specifically, ICICI Bank intended to use the funds to meet its
i.
capital adequacy requirements ahead of switching to Basel-II norms in March 2008
ii.
asset growth needs spurred by an economy that has grown 9.4% in the fiscal year
ended March 31, 20079
Offering and Subscription Details The 2007 Follow-on Public Offering (FPO) had several interesting features. ICICI hired four
leading investment banks - Goldman Sachs (India), DSP Merrill Lynch, Enam and JM Financial
to book-build the domestic leg, and Goldman Sachs and Merrill Lynch to underwrite the ADS
issue. DSP Merrill Lynch was to act as a price-stabilizing agent for the issue post the listing. Like
in the 2005 issue, ICICI reserved a portion of the issue for retail investors, and offered them a
discount to encourage participation – while institutions had to pay Rs. 940 a share, retail
investors could purchase a share for Rs. 890. Interestingly, retail investors could elect to pay this
amount in installments: Rs. 250 on application, another Rs 250 on allotment, and the remaining
9
Offer document
amount (Rs. 390) when the company called for the balance funds, which would occur within the
next six months. Between the time of allotment and the call, these partly-paid securities would
trade in secondary markets to allow investors an exit route in the event that they were unable to
pay the balance amount on call. Once the balance amount was called, the partly paid securities
would cease trading and be replaced by fully paid securities.
The issue was strongly subscribed by institutions10. In particular, agencies controlled by the
Singapore government, Temasek and Government of Singapore Investment Corporation (GIC),
doubled their investment in the company to 20%, shelling out about $1.8 billion to buy this
additional stake.
Table 2: ICICI Subscription Details
QIB Bucket of Rs. 4803.2 crs was subscribed 17.7 times
HNI Bucket of Rs. 1,893.8 crs. was subscribed 3.86 times
Retail Bucket of Rs. 2,909.3 crs. was subscribed 0.95 times
Overall issue of Rs. 10,044 crs. was subscribed 9.36x
Motivations for Issuing Partly Paid Securities ICICI Bank’s primary motivation for issuing partly paid securities was to diversify its
shareholding pattern by building up a strong retail shareholding base. Concentrated
shareholdings mean that a group of large shareholders can effectively combine to control the
firm, whereas shareholders are primarily interested in owning shares for economic reasons.
To make its offering attractive to domestic retail shareholders, ICICI firstly offered its shares at a
50 INR (5.32%) discount to the institutional offer price. However, recognizing that retail
investors may face difficulties in arranging funds, it threw in a further sweetener by allowing
them to pay in installments.
Theoretically, the law of one price dictates that
Partly Paid = Fully Paid – Present Value (Balance Amount)
Retail investors are thereby able to acquire an instrument that would track the fully-paid share at
a lower investment. In this sense, partly-paid securities can offer leverage to an investor who
intends to sell such securities before the balance amount is called. Also, if we consider a scenario
where the price of the underlying share drops below the balance amount, the investor can
choose to walk away from paying the call amount. Therefore, a partly paid security contains an
embedded put, since the loss is limited to one’s investment.
10
Based on information received from JM Financial, one of the book running lead managers
Profit
800
600
400
200
1490
1410
1330
1250
1170
1090
1010
930
850
770
690
610
530
450
370
-200
290
0
-400
-600
However, investing in partly paid securities also has risks, since they incorporate future
obligations to contribute additional capital. The most obvious risk is that the investor is unable
to arrange the funds to pay the balance amount on call. Even if partly paid securities are listed,
the secondary market may not always provide a satisfactory exit since such shares can trade at a
steep liquidity discount to their theoretical prices. The inability to pay the balance amount on call
leads the investor forfeiting the shares.11
460
350000
450
300000
440
430
250000
420
volume
spread
200000
410
400
150000
390
100000
380
370
50000
360
07
/1
3
/2
0
20
07
11
07
10
/3
0
/2
0
/2
0
/2
3
10
11
/6
/
07
07
10
/1
6
/2
0
20
07
10
/9
/
20
07
10
/2
/
20
07
20
07
9/
25
/
9/
18
/
20
07
9/
11
/
00
7
9/
4/
2
20
07
8/
28
/
20
07
0
8/
21
/
8/
14
/
20
07
350
date
Figure 2: ICICI Partly-Paid Securities - Spread and Volume
11
In markets like Australia which have several partly paid securities, regulators require market participants and retail
clients to enter into a “partly paid security agreement” where the risks of such investments are explained. For more
details, see Exhibit 7
Figure 2 (data in Exhibit A8) plots the difference between the fully paid common share and the
partly paid security, and the volumes of the partly paid security. The partly paid securities were
listed on 14 Aug 2007 and traded upto 15 Nov 2007, when the balance amount was called and
the securities delisted.
EXHIBIT A: ICICI
Exhibit A1: Economic trends
Indian economic growth12
12.0
10.0
8.0
6.0
4.0
2.0
0.0
19
50
19 5 1
53
19 5 4
56
19 5 7
59
19 6 0
62
19 6 3
65
19 6 6
68
19 6 9
71
19 -7 2
74
19 7 5
77
19 7 8
80
19 -8 1
83
19 8 4
86
19 8 7
89
19 9 0
92
19 -9 3
95
19 9 6
98
20 9 9
01
20 -0 2
04
20 0 5
07
-0
8
-2.0
-4.0
-6.0
GDP growth rate
10yr avg
USD/INR Exchange rates13
12
13
Source: RBI Database on Indian Economy
Source: Google finance
Exhibit A2: Balance Sheet for ICICI Bank Limited14
In Millions of Rupee
(except per share items)
Cash & Due from Banks
Other Earning Assets, Total
Net Loans
Property/Plant/Equipment,
Total - Gross
Accumulated Depreciation,
Total
Property/Plant/Equipment,
Total - Net
Other Long Term Assets
Other Assets, Total
Total Assets
Accounts Payable
Total Deposits
Other Bearing Liabilities,
Total
Long Term Debt
Capital Lease Obligations
Total Long Term Debt
Total Debt
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred
Stock, Total
Common Stock, Total
Additional Paid-In Capital
Retained Earnings
(Accumulated Deficit)
Unrealized Gain (Loss)
Other Equity, Total
Total Equity
Total Liabilities &
Shareholders' Equity
Total Common Shares
Outstanding
14
Source: Reuters
2008
2008-03-31
298,008.0
1,755,750.0
2,514,020.0
79,376.0
2007
2007-03-31
192,410.0
1,410,650.0
2,113,990.0
69,541.9
2006
2006-03-31
89,859.4
932,830.0
1,562,600.0
62,844.5
2005
2005-03-31
63,701.4
619,092.0
964,100.0
57,817.7
(32,592.5)
(26,140.4)
(21,415.8)
(16,035.8)
46,783.5
43,401.5
41,428.7
41,781.9
23,595.5
224,331.0
4,862,480.0
121,525.0
2,769,830.0
--
14,234.0
175,234.0
3,949,920.0
105,832.0
2,486,140.0
--
-145,574.0
2,772,300.0
-1,724,510.0
--
-95,661.9
1,784,340.0
-1,011,090.0
--
845,660.0
-845,660.0
845,660.0
6,315.0
7,311.9
661,113.0
4,411,760.0
3,500.0
616,595.0
-616,595.0
616,595.0
6,574.9
5,095.6
486,538.0
3,706,770.0
3,500.0
449,999.0
-449,999.0
449,999.0
-2,749.4
369,119.0
2,546,380.0
--
383,690.0
-383,690.0
383,690.0
-1,524.8
261,793.0
1,658,090.0
--
11,126.8
320,914.0
116,441.0
8,993.4
127,189.0
99,117.5
12,398.3
-213,519.0
10,867.8
-115,374.0
979.3
(2,238.1)
450,722.0
4,862,480.0
4,867.7
(516.8)
243,150.0
3,949,920.0
--225,918.0
2,772,300.0
--126,242.0
1,784,340.0
1,112.69
899.27
889.82
616.39
Exhibit A3: Income Statement for ICICI Bank Limited15
In Millions of Rupee
(except per share items)
Interest Income, Bank
Total Interest Expense
Net Interest Income
Loan Loss Provision
Net Interest Inc. After Loan
Loss Prov.
Non-Interest Income
Non-Interest Expense
Net Income Before Taxes
Provision for Income Taxes
Net Income After Taxes
Minority Interest
Net Income Before Extra.
Items
Net Income
Basic Weighted Average
Shares
Basic EPS
Diluted Weighted Average
Shares
Diluted EPS
DPS - Common Stock
Primary Issue
Gross Dividends - Common
Stock
Total Special Items
Normalized Income Before
Taxes
Effect of Special Items on
Income Taxes
Inc Tax Ex Impact of Sp
Items
Normalized Income After
Taxes
Normalized Inc. Avail to
Com.
Basic Normalized EPS
2008
2008-03-31
2007
2007-03-31
2006
2006-03-31
2005
2005-03-31
340,950.0
257,670.0
83,279.8
27,723.9
55,555.9
240,025.0
176,757.0
63,268.3
22,082.2
41,186.0
151,358.0
101,015.0
50,343.5
8,117.2
42,226.3
98,337.6
68,043.8
30,293.8
(889.9)
31,183.6
257,858.0
(271,164.0)
42,249.5
11,096.8
31,152.6
2,829.7
33,982.3
173,305.0
(180,516.0)
33,974.8
7,640.8
26,334.0
1,272.3
27,606.3
94,796.9
(106,035.0)
30,988.2
6,998.0
23,990.2
210.7
24,200.9
70,976.3
(78,375.7)
23,784.2
5,683.8
18,100.4
422.9
18,523.3
33,982.3
1,055.59
27,606.3
892.82
24,200.9
781.69
18,523.3
727.73
32.193
1,062.10
30.920
897.74
30.960
789.96
25.454
733.72
31.995
11.000
30.751
10.000
30.635
8.500
25.246
8.500
12,239.6
9,085.4
7,563.3
6,329.6
1,071.5
43,321.0
603.4
34,578.2
298.8
31,287.0
338.8
24,123.0
281.4
135.7
67.5
81.0
11,378.3
7,776.5
7,065.5
5,764.8
31,942.7
26,801.7
24,221.6
18,358.3
34,772.3
28,074.0
24,432.3
18,781.1
32.941
31.444
31.256
25.808
16
Exhibit A4: Bond Issuance activity of ICICI Bank
Dates of
15
16
Description
Amount
Date of
Source: Reuters. Earnings for 2005, 2006 and 2007 have been restated by the company.
Company filings over the 5 years preceding the issue; summarized in offering prospectus
Rating at the
closure,
Deemed
Allotment,
despatch
Jan 2003 Jan27,2003;
Feb 26, 2003;
Ap 1, 2003
Allotted
Redemption
time of Issue
Public Issue of Unsecured
Redeemable Bonds in the nature of
Debentures aggregating Rs. 4.00
billion with a right to retain
oversubscription upto Rs. 4.00 billion
11,220 mn
(INR)
ICRA “LAAA”
CARE “AAA”
Mar 2003 Mar 31, 2003;
Apr 30, 2003;
May 22, 2003
4,810 mn
(INR)
Aug 2003 Sep 9, 2003;
Oct 9, 2003;
Nov 3, 2003
3,430 mn
(INR)
Oct 2003;
Oct 22, 2003;
NA
Oct 2003 Nov 15, 2003;
Dec 15, 2003;
Jan 14, 2004
4.75% Fixed Rate Notes
300 mn
(USD)
Tax Saving
I. Feb 26, 2006
II Jun 26, 2006
III Feb 26, 2008
IV Jun 26, 2008
Tax Saving
I Apr 3, 2006
II Aug 3, 2006
III Apr 3, 2008
IV Aug 3, 2008
Regular Income
Apr 3, 2010
Tax Saving
I Apr 30, 2006
II Aug 30, 2006
III Apr 30, 2008
IV Aug 30, 2008
Regular Income
Apr 30, 2010
Tax Saving
I Oct 9, 2006
II Feb 9, 2007
III Oct 9, 2008
IV Feb 9, 2009
Regular Income
Oct 9, 2010
Oct 22, 2008
4,860 mn
(INR)
ICRA “LAAA”
CARE “AAA”
Dec 2003 Jan 6, 2004;
Feb 5, 2004;
Mar 13, 2004
5,230 mn
(INR)
Tax Saving
I Dec 15, 2006
II Jun 15, 2007
III Dec 15, 2008
IV Jun 15, 2009
Regular Income
Dec 15, 2010
Tax Saving
I Feb 5, 2007
II Aug 5, 2007
III Feb 5, 2009
IV Aug 5, 2009
Aug 18, 2009
7,750 mn
(INR)
ICRA “LAAA”
CARE “AAA”
5,290 mn
(INR)
Tax Saving
I Mar 11, 2010
II Mar 11, 2012
Regular Income
I Mar 11, 2010
II Mar 11, 2012
III Mar 11, 2015
Children’s Growth
I Mar 11, 2010
II Mar 11, 2012
Tax Saving
I Apr 8, 2010
II Apr 8, 2012
Regular Income
I Apr 8, 2010
II Apr 8, 2012
III Apr 8, 2015
Children’s Growth
I Apr 8, 2010
Feb 2003 Mar 4, 2003;
Apr 3, 2003;
May 5, 2003
Aug 2004;
Aug 18, 2004;
NA
Jan 2005 Feb 9, 2005;
Mar 11, 2005;
Apr 7, 2005
Feb 2005 Mar 9, 2005;
Apr 8, 2005;
May 10, 2005
7,400 mn
(INR)
300 mn
(USD)
ICRA “LAAA”
CARE “AAA”
ICRA “LAAA”
CARE “AAA”
ICRA “LAAA”
CARE “AAA”
Moody’s Baa3
S&P BB
ICRA “LAAA”
CARE “AAA”
Moody’s Baa3
S&P BB+
ICRA “LAAA”
CARE “AAA”
Mar 2005 Mar 31, 2005;
Apr 30, 2005;
May 27, 2005
3,240 mn
(INR)
Nov 2005;
Nov 16, 2004;
NA
Aug 2006;
Aug 17, 2006;
NA
500 mn
(USD)
7.25 perpetual non-cumulative
subordinated debt securities
340 mn
(USD)
Oct 2006;
Oct 20, 2006;
NA
Nov 2006;
Nov 22, 2006;
NA
Jan 2007;
Jan 12, 2007;
NA
400 mn
(USD)
Jan 2007;
Jan 12, 2007;
NA
Jan 2007;
Jan 12, 2007;
NA
Mar 2007;
Mar 29, 2007;
NA
Apr 2007;
Apr 29, 2007;
NA
May 2007;
May 4, 2007;
NA
II Apr 8, 2012
Tax Saving
I Apr 30, 2010
II Apr 30, 2012
Regular Income
I Apr 30, 2010
II Apr 30, 2012
III Apr 30, 2015
Children’s Growth
I Apr 30, 2010
II Apr 30, 2012
Nov 16, 2010
ICRA “LAAA”
CARE “AAA”
Moody’s Baa3
S&P BB+
Perpetual; first call
31 Oct 2016,
coupon dates
thereafter
Oct 20, 2011
Moody’s Baa2
S&P BB+
100 mn
(USD)
Oct 20, 2011
Moody’s Baa2
S&P BB+
750 mn
(USD)
Moody’s Baa2
S&P BB-
750 mn
(USD)
15 years call, first
call 30 Apr 2017,
coupon dates
thereafter
Jan 12, 2012
Floating Rate Notes
500 mn
(USD)
Jan 12, 2012
Moody’s Baa2
S&P BB+
Floating Rate Notes
500 mn
(EUR)
Mar 29, 2009
Moody’s Baa2
S&P BBB-
Floating Rate Notes
50 mn
(EUR)
Mar 29, 2009
Moody’s Baa2
S&P BBB-
Floating Rate Notes
50 mn
(EUR)
Mar 29, 2009
Moody’s Baa2
S&P BBB-
Moody’s Baa2
S&P BB+
Moody’s Baa2
S&P BB+
Exhibit A5: Equity Issuance activity of ICICI Bank17
Public Issue of Equity Shares (2005)
Public Issue of 97,155,388 Equity Shares of Rs. 10/- each at a price of Rs. 525/- per share for cash aggregating
Rs. 50,000 million (the “Issue”) with a green shoe option of 14,285,714 Equity Shares of Rs.10/- each at a price
of Rs. 525/- per share for cash aggregating Rs. 7,500 million closing 6 Dec 2005.
No. of shares allotted
66,275,828 to Qualified
Institutional Bidders and
Non-Institutional Bidders
1,511,494 to Qualified
Institutional Bidders and
Non-Institutional Bidders
12,988,820 to Existing
Retail Shareholders and
Retail Bidders
15,905,240 to Existing
Retail Shareholders and
Retail Bidders
14,285,714 (Green Shoe
option)
Nature of payment
Fully paid-up
Issue Price per share
525
Date of allotment
December 16, 2005
Fully paid-up
525
December 20, 2005
Fully paid-up
498.75 (After discount of
5% on the issue price )
December 16, 2005
Partly paid-up (Rs.150
on application, 348.75
on allotment)
Fully paid-up
498.75 (After discount of
5% on the issue price )
December 16, 2005
525
December 16, 2005
American Depositary Shares Issue (2005)
18,618,730 American Depositary Shares (ADSs), each representing two Equity Shares issued at US$ 26.75 per
ADS aggregating US$ 433,087,850 with an over allotment option of 2,428,530 ADSs, each representing two
18
Equity Shares issued at US$ 26.75 per ADS aggregating US$ 64,963,178 closing 6 Dec 2005.
Public Issue of Equity Shares (2004)
Public Issue of 108,928,571 Equity Shares of Rs.10/- each at a price of Rs.280/- for cash aggregating Rs. 30.50
bn with a green shoe option of 16,071,429 Equity Shares of Rs. 10/- each at a price of Rs. 280/- for cash
aggregating Rs. 4.50 bn.
Closing Date : April 7, 2004
Date of Allotment : April 21, 2004
Exercise of Green Shoe Option
Date of Allotment : May 24, 2004
We had sponsored an American Depositary Shares (ADS) which opened for participation on March 7, 2005
and closed on March 11, 2005. In terms of the Offering, 20,685,750 ADSs representing 41,371,500 Equity
Shares had been sold at a price of US$ 21.1 per ADS. The gross proceeds from the ADS Offering were
approximately US$ 436.7 million (Rs.19.10 billion). The net consideration per share (after deduction of expenses
in connection with the offering) was Rs. 453.16.
17
Company filings over the 5 years preceding the issue; summarized in offering prospectus
ADSs are securities that trade in US markets but represent a share in a company listed overseas. The NYSE /
SEC impose requirements for firms seeking to list on US exchanges.
For no arbitrage, local shares would have to trade at 26.75*exchange rate /2 = 535 at an exchange rate of 40; the
actual exchange rate may have been different. ADS typically trade at a premium to local shares, due to
institutional restrictions on conversion.
18
Exhibit A6: Issue Prospectus
Exhibit A7: ASX Press Release on Partly Paid Securities
AD09-57 ASIC and ASX act to protect retail investors of partly paid
securities19
Monday 6 April 2009
ASIC and the Australian Securities Exchange (ASX) have agreed that ASX will implement changes to
its market rules relating to partly paid securities and installment receipts ‘Partly Paid Securities’.
The proposed amendments are aimed at improving disclosure for retail investors to ensure they are
adequately aware of potential liabilities when making investment decisions.
ASIC is aware that a number of securities quoted on the ASX are partly paid securities with future
obligations to contribute further capital. Therefore ASIC believes that the enhanced investor protection
embodied in this new measure helps address current market concerns.
The specific operating rule changes agreed to are:
1. A new definition of ‘Partly Paid Security’ is to be included in the Definitions section of the
market rules.
2. A new requirement for market participants and retail clients to enter into a Partly Paid Security
Client Agreement prior to the retail client buying Partly Paid Securities for the first time.
The new market rules do not apply to no liability (‘NL’) companies, as NL companies do not have a
contractual right to recover calls on the unpaid issue price of their shares; the shareholder has the
option of paying the call or forfeiting the shares.
ASIC and ASX have been in direct contact with several market participants to ensure that they have
contacted their clients with current orders to buy Partly Paid Securities and communicated their
potential obligations to them.
Changes to the ASX market rules are subject to Ministerial approval and that approval was received
today. The new rules are effective from 1 May 2009.
19
Source:http://www.asic.gov.au/asic/asic.nsf/byheadline/AD0957+ASIC+and+ASX+act+to+protect+retail+inv
estors+of+partly+paid+securities?openDocument
Exhibit A8: Historical Data
Date
Partly Paid Fully Paid C
Total TradeApprox USD turnov
14-Aug-07
484.5
878.65
398400
3,895,077
16-Aug-07
436.7
832.15
175506
1,533,958
17-Aug-07
433.2
824.7
60574
524,086
20-Aug-07
478.05
872.35
68729
650,108
21-Aug-07
435.1
829.05
32648
292,866
22-Aug-07
454.05
846.1
44339
393,810
23-Aug-07
435.3
824.95
39137
353,031
24-Aug-07
440.8
833.8
15285
134,266
27-Aug-07
484.2
883.55
48821
461,456
28-Aug-07
467.15
862.9
20174
189,458
29-Aug-07
464.45
857.1
13692
125,654
30-Aug-07
470.35
873.05
14590
136,700
31-Aug-07
484.65
888.4
43261
418,715
3-Sep-07
502.6
907.9
48244
481,861
4-Sep-07
503.45
908.6
36338
367,174
5-Sep-07
507.5
915.4
56534
573,990
6-Sep-07
511.55
920.9
31849
323,898
7-Sep-07
510.9
920.05
57704
593,128
10-Sep-07
503.05
910.9
27517
277,190
11-Sep-07
495.75
901.55
24669
246,478
12-Sep-07
483.5
885.35
22602
220,962
13-Sep-07
485.15
884.05
32002
313,312
14-Sep-07
499.2
906.3
76195
769,249
17-Sep-07
491.6
895.15
17098
170,385
18-Sep-07
512.4
924.55
66075
672,168
19-Sep-07
551.35
973.55
248741
2,692,472
20-Sep-07
543.1
967.1
42387
462,349
21-Sep-07
548.35
966.05
78193
854,806
24-Sep-07
563.1
996.3
90857
1,017,780
25-Sep-07
570.3
993.05
131617
1,492,642
26-Sep-07
596.6
1020
178969
2,113,803
27-Sep-07
598.6
1028.25
124177
1,489,776
28-Sep-07
629.3
1062.4
171578
2,121,802
1-Oct-07
622.6
1057.8
66540
824,763
3-Oct-07
645.5
1086.55
177527
2,288,465
4-Oct-07
624.2
1068
96372
1,190,329
5-Oct-07
606.5
1036.4
163681
2,026,534
8-Oct-07
588.35
1021.2
52914
618,374
9-Oct-07
616.6
1045.65
52354
630,468
10-Oct-07
634.15
1070.55
94525
1,188,709
11-Oct-07
653.7
1091.25
55901
721,693
12-Oct-07
620.65
1055
51390
646,116
15-Oct-07
658.25
1097.45
72916
945,443
16-Oct-07
716.1
1159.65
211141
2,963,617
17-Oct-07
670.35
1117.1
136672
1,799,697
18-Oct-07
597
1036.5
155690
1,991,151
19-Oct-07
586.6
1022.8
123504
1,448,677
22-Oct-07
625.1
1061.35
70293
866,080
23-Oct-07
666
1102
57670
758,095
24-Oct-07
663
1099.9
44752
596,884
25-Oct-07
701.85
1144.65
126214
1,747,509
26-Oct-07
743
1187.5
133003
1,932,640
29-Oct-07
795.15
1240.65
96104
1,521,538
30-Oct-07
801.3
1240.2
143971
2,326,543
31-Oct-07
820.55
1254.05
128504
2,099,421
1-Nov -07
846.95
1298.3
195920
3,301,761
2-Nov -07
891.65
1333.4
217453
3,681,740
5-Nov -07
842.7
1269.85
50004
854,788
6-Nov -07
822.15
1241.8
48955
816,736
7-Nov -07
793.85
1200.8
71712
1,151,078
8-Nov -07
754.2
1169.05
34175
517,300
9-Nov -07
731.25
1144.45
5511
81,510
12-Nov -07
730.15
1145.35
56421
788,122
13-Nov -07
750.95
1173.7
36116
530,248
14-Nov -07
838.4
1278.55
101745
1,652,074
15-Nov -07
822.55
1241.65
32248
530,976
Tata Motors Differential Voting Rights Introduction In 2008, Tata Motors, India’s largest automobile manufacturer, sought to raise additional capital
through a rights offering. Tata Motors was part of one of India’s largest business groups, the
Tata Group of companies, which held a one-third stake in Tata Motors at the time the case was
written. Tata Sons, the promoter of Tata group companies, is a closely held company, two thirds
of which is held by philanthropic trusts endowed by members of the Tata family. Established in
1945, Tata Motors was India’s leading manufacturer of commercial vehicles and had steadily
expanded its share in the passenger vehicles segment. Throughout its history, the company
emphasized the use of pioneering technologies, a strong R&D focus, a commitment to safety
and environmental standards, and its Indian roots. India’s strong economic growth through the
first decade of the 21st century had led to a strong demand for commercial vehicles, and made
passenger cars affordable to a broader section of society.
Along with its dominant stature in the domestic market, Tata Motors also sought to obtain an
international footprint in commercial vehicles. In 2004, it acquired South Korea’s second largest
truck manufacturer, Daewoo Commercial Vehicles Company, which became a major South
Korean exporter of commercial vehicles. It also acquired a 21% stake in a Spanish bus
manufacturer, Hispano Carrocera, and formed joint ventures with Marcopolo, a Brazilian coach
manufacturer to sell buses; and with Thonburi Automotive, an assembly plant in Thailand to
produce its Xenon line of pickup trucks.
Over the past two decades, Tata Motors had also grown its presence in the passenger car
segment to become India’s third largest passenger car manufacturer. Starting with cars which
were essentially modifications of its commercial vehicle designs, Tata Motors developed India’s
first fully indigenous car, the Tata Indica. On 18 Dec 2007, Tata Motors bid USD 2.05 billion to
acquire the iconic Jaguar and Land Rover brands from Ford Motors. And on 10 Jan 2008, Mr.
Ratan Tata, the Tata Motors chairman, unveiled the Tata Nano, a widely anticipated ‘People’s
Car’ that would set new standards of affordability by retailing for INR 100,000 (USD 2,500).20
Funding of the Acquisition After negotiations between Ford and Tata, the deal for the acquisition of Jaguar and Land Rover
(JLR) was struck on 26 Mar 2008 for approximately USD 2.3 billion ( INR 9,200 crore )21 – all of
which was in cash. As part of the deal, Ford committed to continue supplying automotive
components and engineering support after the transaction, as well as customer financing for a
20
21
Throughout this case, an exchange rate of 40 Indian rupees to the US dollar has been assumed.
A crore is a unit equivalent to 10 million
transitional period of 12 months. To fund this acquisition, Tata Motors took a 15 month USD 3
billion bridge loan from a syndicate of banks led by Citigroup and J P Morgan. This excess
amount over the agreed acquisition price was meant to cover engine and component supplies,
working capital requirements, and unforeseen contingencies.
The bridge loan was an expensive way to fund the acquisition, but Tata Motors regarded the
acquisition as strategic – they did not want to risk the possibility that the deal would not go
through while they were lining up cheaper sources of financing. Tata Motors intended the bridge
loan to be a short term affair, and retire this by raising longer term debt, stake sales in
subsidiaries, and through a global rights issue. Also, at the time of acquisition, Tata Motors was
of the view that JLR would be able to generate its working capital internally, as Land Rover was
recording high sales, and Jaguar sales were also improving. The deal was viewed neutrally by the
market.
Since the bridge loan for only short term, it would need to be substituted with another long term
source of financing later. One of the options for raising long term funds for a conglomerate
holding company like Tata Sons would be to sell some of its stake in a subsidiary company. In
early April 2008, Tata Motors was reported to be making plans to sell stakes in some of its to
gather funds to purchase JLR, and to raise over JPY 100 billion (USD 983 million at then rates)
by listing depositary receipts on the Tokyo Stock Exchange.
On 29 May 2008, Tata Motors announced plans to raise INR72 billion ($1.68 billion) through
three separate rights issues, which would expand the company's equity capital by about 30%35%. On completion of the three rights issues, the Company also planned to raise $500 million$600 million through an issue of securities in the overseas markets. Shares of Tata Motors
Limited surged down on concerns over equity dilution.
Along with a falling share price, Tata Motors was also faced protests that suspended work in the
state of West Bengal, where farmers in Singur were unwilling to give up their land to create a
space to build a factory for producing the widely awaited Nano cars. Tata Motors was eventually
forced to pull out of the Singur project in October 2008.
On 20 Aug 2008, Tata Motors announced that it had scrapped its planned INR 30 billion ($686
million) convertible preference share issue due to weak stock markets and would instead raise
funds by selling some investments, but that its sale of rights shares worth INR 42 billion would
proceed as planned.
Details of the Rights Offering On 2 Sep 2008, Tata Motors Limited announced a fast track rights issue, which it intended to
complete by the end of September.22 Under the terms of the rights offer document dated 18
Sep 2008, existing shareholders as on the record date ( 16 Sep 2008 ) would, for every six
ordinary shares held, be able to subscribe for:
1. One ordinary share at a price of Rs 340. This represented a 20% discount to the closing
share price of 429.80.
2. One ‘A’ ordinary share at a price of Rs 305
The ‘A’ ordinary share would pay a higher dividend but have a lower voting share than the
ordinary shares – ‘A’ shareholders would be entitled to an extra dividend of INR 0.50 per share,
and to one vote for every 10 shares held. Such instruments would likely appeal to retail investors
who held stocks for purely economic reasons and would therefore value the 5% higher
dividend23, but were generally not concerned about control rights. For the company, it would
allow Tata Motors to widen its equity capital base with a much lower dilution of the control
enjoyed by Tata Sons. While different classes of shares were quite common in some markets like
Europe, this was the first time shares with differential voting rights were issued in India. If fully
subscribed, the rights issue24 would have represented a 33.33% increase in the equity capital of
the form, and an 18.33% increase in voting shares.
Table 3: Tata Motors Shares Outstanding if Rights Issue Fully Subscribed
Shares outstanding
Ordinary shares
A shares
Before the issue
After the issue
Sales proceeds
385,656,979
449,933,143
21.85 bn INR
0
64,276,164
19.60 bn INR
This issue would open on 29 Sep, 2008 and close on Oct 20, 2008. Tata Motors also entered into
an underwriting agreement with JM Financial, a bookrunner, to underwrite the A share issue for
a maximum amount of INR 13.27 billion (43.5 million A shares). Under the terms of this
agreement, JM Financial would be responsible for fulfilling any shortfall in demand at a price of
Rs 305 per ordinary share.
Post Issue Performance As events unfolded during the global financial crisis, share prices fell sharply through September
2008. Lehman Brothers, a bulge-bracket American investment bank, filed for bankruptcy on 15
22
Business Line, 2008.
On a par value of Rs 10 per ordinary share
24
Rights will be only exercised by investors if the market price is higher than the subscription price (they are in
the money ). A modification of the Black Scholes formula can be used to price rights. ( Exhibit 8 )
23
September 2008, and share prices crashed globally as panic gripped global markets. Tata Motors
lost 40% of its value to hit a 52 week low, and the public shareholders did not exercise their
rights. Nonetheless, the promoter group invested more than INR 30 billion to pick up the
unsubscribed portion of the rights issue, raising their stake from 33% to 42%. The underwriter,
JM Financial Consultants, which was also the lead manager, subscribed to A shares worth INR 3
billion.25
Tata Motors raised INR 10 billion of debt from Life Insurance Corp. of India in November at
an 11% interest rate, to refinance loans that funded its purchase of Jaguar and Land Rover
brands. In January 2009, it raised 4 billion INR through commercial paper issuance. In May
2009, it successfully raised INR 4.2 billion by issuing secured non-convertible debt, as it
continued discussions with the U K Government on financing plans for JLR. It also renegotiated
the terms of its bridge loan to extend this by 18 months. And in Oct 2009, Tata Motors Limited
raised USD 750 million through issuing global depositary shares (GDSs) and convertible notes.
The A shares listed on 5 Nov 2008, and its subsequent trading pattern in presented in Exhibit 9.
25
http://www.blonnet.com/2008/11/01/stories/2008110151670300.htm
EXHIBIT B: TATA MOTORS
Exhibit B1: Balance Sheet
Exhibit B2: Income Statement
Exhibit B3: Cash Flow Statement
Exhibit B4: Terms of bridge loan (summarized)
Arrangers: including the Bank of Tokyo-Mitsubishi UFJ Limited, Citigroup Global Markets Asia Limited,
ING Bank N.V., Singapore Branch, J.P. Morgan Securities (Asia Pacific) Limited, Mizuho Corporate Bank
Limited, Standard Chartered Bank, State Bank of India and BNP Paribas, Singapore Branch.
1) Borrower: JaguarLandRover Limited, a limited liability company incorporated in England, which is
100% directly owned by TML Holdings Pte Limited, a Singaporean limited liability company, which
is, in turn, 100% directly owned by TML.
2) Support: Guarantee from TML.
3) Facility Agent: Citicorp International Limited.
4) Obligors: JaguarLandRover Limited, TML Holdings Pte Limited and TML.
5) Amount: US$ 3,000 million.
6) Purpose: JaguarLandRover Limited has agreed to apply all amounts borrowed by it under the facility
only towards:
- partially financing the acquisition;
- to the extent stipulated, the on-loan to Jaguar Land Rover to be applied towards Jaguar Land
Rover’s working capital needs and/or the capitalisation of the Jaguar Land Rover;
- acquisition costs; and
- any other costs incurred by the JaguarLandRover Limited in relation to the acquisition including
any contingency requirement of Jaguar Land Rover.
7) Rate of Interest: The rate of interest for loan for each interest period is the percentage rate per annum
which is the aggregate of the applicable margin, LIBOR and mandatory cost, if any. The applicable
margin is 0.85% for the first 6 months, 1.2% for next 3 months, and 1.5% thereafter until the maturity
date.
8) Maturity Date: The date falling, 364 days from and including the first drawdown date, i.e., June 2,
2008.
9) Repayment: The aggregate loans are to be repaid in full on the maturity date.
10) Voluntary Prepayment: JaguarLandRover Limited may prepay the whole or any part of the loans (if
in part, being an amount that reduces the amount of the loan by a minimum amount of US$ 25,000,000
and an integral multiple of US$ 10,000,000 or the remaining amount of the loan), if it gives the
Facility Agent not less than 5 business days prior notice in the case of a prepayment on the last day of
an interest period or 8 business days prior notice, otherwise.
11) Mandatory Prepayment: From June 2, 2008 until the maturity date, the loans shall immediately be
prepaid from an amount equal to the mandatory prepayment proceeds.
- Prior to submission of a refinancing plan to the Facility Agent, mandatory prepayment proceeds
include proceeds from disposals of certain property, plant and equipment, issuance of shares,
termination proceeds in excess of US$ 10 million in aggregate in relation to hedging agreements,
permitted facility refinancing financial indebtedness and certain types of insurance claims
received. In relation to the aforementioned mandatory prepayments, US$ 32.4 million has been
contributed by JaguarLandRover Limited towards a mandatory prepayment account with the
Facility Agent to be applied towards the prepayment of the Short Term Bridge Loan.
- Subsequent to submission of a refinancing plan to the Facility Agent, such mandatory prepayment
proceeds include (a) proceeds of any refinancing option under the Company’s refinancing plan, (b)
any issuance of shares including by way of a rights issue and (c) any permitted facility refinancing
financial indebtedness. For details on the Company’s plans to refinance the Short Term Bridge
Loan see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Financing of the Jaguar Land Rover Acquisition” on page 135 of this Letter of Offer.
12) Guarantees/charges or security: TML irrevocably and unconditionally:
- guarantees to each financing party punctual performance by the other obligors of all the other
obligor’s obligations under the finance documents;
- undertakes with each lender that whenever either of the obligors do not pay any amount when due
under or in connection with any finance document, TML shall immediately on demand pay that
amount as if it was the principal obligor;
- TML’s maximum liability shall be limited to a total aggregate amount of US$ 3,000 million.
13) Negative pledge: No obligor shall create or permit to subsist any security over any of its assets. No
obligor shall:
- sell transfer or otherwise dispose of any of its assets on terms whereby they are or may be leased
to or re-acquired by an obligor or any other obligor;
- sell transfer or otherwise dispose of any of its receivables on recourse terms;
- enter into or permit to subsist any title retention agreement;
- enter into or permit to subsist any arrangement under which money or the benefit of a bank or
other account may be applied set off or made subject to a combination of accounts;
- enter into or permit to subsist any other preferential arrangement having a similar effect.
in circumstances where the arrangement or transaction is entered into primarily as a method of raising
Financial Indebtedness or of financing the acquisition of an asset.
14) Other covenants/ conditions: Compliance of the following to be ensured:
- No obligor may incur or permit to be outstanding any financial indebtedness other than permitted
financial indebtedness.
- TML shall at all times own 100% of the total issued share capital in TML Holdings Pte Limited
and shall control each of TML Holdings Pte Limited, JaguarLandRover Limited and companies
and subsidiaries forming part of Jaguar Land Rover.
- TML Holdings Pte Limited shall at all times own 100% of JaguarLandRover Limited and
JaguarLandRover Limited shall at all times after the acquisition, own directly or indirectly not less
than 76% of the total issued share capital of each of the companies and subsidiaries forming part
of Jaguar Land Rover.
15) Default events and interest: Events of default include:
- obligor does not pay on the date any amount payable pursuant to the finance document;
- an obligor does not comply with the terms in relation to negative pledge;
- any representation made by an obligor in the finance documents or any other documents delivered
by or on behalf of any obligor under or in connection with the finance documents, is misleading
and if capable of remedy not remedied within 20 days of the earlier of the facility agent giving
28
notice to the borrower or any obligor becoming aware of the failure to comply;
- any financial indebtedness of any obligor or material subsidiary is not paid when due or within
any original grace period;
- the value of the assets of any obligor or material subsidiary is less than its liabilities;
- the initiation of any legal proceeding for winding up, dissolution, administration, judicial
management of any obligor or any material subsidiary;
- all or any material part of the share capital of any obligor or material subsidiary is seized,
nationalized, expropriated or compulsorily purchased by any governmental agency or state owned
corporations, (or an order is made to that effect);
- Tata Sons Limited ceases to own and control a minimum shareholding of not less than 26 % of
TML’s total issues share capital;
- it is or becomes unlawful for an obligor to perform any of its obligations under any transaction
document;
- any obligor or material subsidiary suspends or ceases to carry on all or a material part of its
business or of the business of the obligors and material subsidiaries taken as a whole;
- any event or circumstance occurs which has a material adverse effect.
Exhibit B5: Shareholding Pattern at the time of issue
Exhibit B6: Offer Document
Exhibit B7: Daily Share Prices
2/1/2010
Close Price
398.85
417.8
416.05
423.3
415.3
393.7
387.5
384
374.55
354.6
343.9
339.65
330.5
314
316.6
299.95
292.35
299.3
299.45
282.5
251
243.45
244
247.75
High Price
Low Price
Close Price
10/1/2009
6/1/2009
2/1/2009
10/1/2008
6/1/2008
2/1/2008
10/1/2007
6/1/2007
2/1/2007
6/1/2006
2/1/2006
10/1/2005
6/1/2005
0
200
400
600
800
1000
2/1/2005
1200
Open Price
10/1/2006
Date
16-Sep-08
17-Sep-08
18-Sep-08
19-Sep-08
22-Sep-08
23-Sep-08
24-Sep-08
25-Sep-08
26-Sep-08
29-Sep-08
30-Sep-08
1-Oct-08
3-Oct-08
6-Oct-08
7-Oct-08
8-Oct-08
10-Oct-08
13-Oct-08
14-Oct-08
15-Oct-08
16-Oct-08
17-Oct-08
20-Oct-08
21-Oct-08
Exhibit B8: Pricing Rights26
26
Lauterbach and Schultz, 1990.
1/5/2010
12/5/2009
11/5/2009
10/5/2009
9/5/2009
8/5/2009
7/5/2009
6/5/2009
5/5/2009
4/5/2009
3/5/2009
2/5/2009
1/5/2009
12/5/2008
400
200
0
1/5/2010
12/5/2009
11/5/2009
absolute spread
10/5/2009
9/5/2009
8/5/2009
7/5/2009
Ordinary Share
6/5/2009
5/5/2009
4/5/2009
A share
3/5/2009
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
2/5/2009
1/5/2009
12/5/2008
-400
11/5/2008
-200
11/5/2008
Exhibit B9: Differential Voting Rights Price History
(INR)
1000
100%
800
80%
600
60%
40%
20%
0%
-20%
-40%
-60%
relative spread
Volumes
Ranbaxy Acquisition by Daiichi Sankyo Introduction In 2008, Ranbaxy was India’s largest pharmaceutical company. The company operated mainly as
a generic drug manufacturer and marketer. Ranbaxy markets its products in more than 125
countries, with offices in 49 countries and manufacturing locations in 11 countries.
Ranbaxy was started in 1937 as a pharmaceutical drugs distributor. It was incorporated in 1967
and has since been a closely held company under the control of the founding family. The Singh
family owned 34.8% of the company and Dr. Malvinder Singh held the position of Chairman
and CEO of Ranbaxy.
Established in 2005 as a result of merger between two century old Japanese pharmaceutical
companies - Sankyo Co. Ltd. and Daiichi Pharmaceutical Co. Ltd. - Daiichi Sankyo is Japan’s
third largest pharmaceutical company. The company manufactures and markets its branded
drugs in Japan, US and Europe.
On June 11, 2008; Ranbaxy and Daiichi Sankyo announced an agreement whereby Daiichi
Sankyo would acquire majority control of Ranbaxy and the Singh family would be fully divested
from its ownership in Ranbaxy. The agreed transaction comprised of the sale of its entire
holding in Ranbaxy by the Singh family to Daiichi Sankyo at a price of INR 737 per share (the all
cash offer was made in local currency INR, which thus removed the exchange rate risk between
the deal announcement and consummation). As per the Indian takeover code, Daiichi Sakyo
would have to make a public offer to the public shareholders for 20% of the total equity base at
a price equal to or greater than INR 737 per share. The offer represented 31.4% premium over
Ranbaxy’s closing price prior to announcement and a 39.7% premium over the one week average
stock price prior to the deal announcement.
Post announcement, the deal faced significant uncertainty owing to adverse developments in
Ranbaxy’s business and the resulting price decline. Exhibit C1 shows the timeline of events
starting from deal announcement and Figure 3 the share price movement of the target and the
bidder.
Execution of Arbitrage As discussed previously, the stock price of the target does not jump instantly to the offer price
due mainly to a non-zero probability of deal falling through. However, in this case, the structure
of the deal introduces a new complication in setting up an arbitrage position. Since the public
participation in the deal is limited to only 20% of total shares in Ranbaxy, hence the arbitrageur’s
ex-ante expected price at which the position can be exited upon deal consummation will depend
on the expected tender ratio and expected stock price after the open offer closes.
Looking at Ranbaxy’s stock price movement, we can see a run up in prices prior to deal
announcement on June 11, 2008, which suggests insider purchases in anticipation of
announcement. For this reason when analyzing the stock price impact of material news such as
M&A, we take the pre-announcement price as average of last one week prices. In this case, in
order to start the analysis the arbitrageur can make the initial assumption that the stock price
after the open offer will revert back to the lowest price in the last 5 trading days prior to
announcement (which in this case is INR 506.9). In this case, if we make the worst case
assumption that all the public shareholders will want t tender in the open offer:
Expected weighted average exit price =
737*(20%/65.18%) + 506.9*(45.18%/65.18%) = 577.5
Since this is below the closing price of INR 561 on announcement date, based on the above
assumptions, there is a potential to set up a profitable arbitrage trade by going long the stock in
spot market.
However, as a result of the global credit and liquidity crisis, the Indian stock market too has been
into a bear phase during 2008, adding to that Ranbaxy stock was trading near its 3 year high price
during this time. Hence, there is a very real chance that if the deal falls through, Ranbaxy stock
could fall much below INR 506.9 in absence of the possibility of the transaction supporting the
high prices. For this reason, we can also do a stress testing of our hypothesis to see at what post
deal market price will an arbitrage position set up on deal announcement will become
unprofitable, for this:
561 = 737*(20%/65.18%) + x*(45.18%/65.18%) => x = 483.09
Hence, as long as the arbitrageur can infer from available information that the post deal stock
price will not go below INR 483.09, he can set up a long position in stock which can provide
positive returns even if all the public shareholders decide to tender their holding. The arbitrageur
needs to see the price history of the stock (Figure 5) and make conjectures using available
information as to the possibility of stock price going below this.
Understanding Futures Movement Monitoring futures market data can be quite useful in understanding market’s assessment of the
deal. Theoretically speaking, futures pricing incorporates the present value of corporate actions
such as dividend payments.
Ft = [S – PV(CACt)] * ert
Where,
Ft = Current price of futures maturing at time t
S = Current stock price
R = risk free rate of interest
CACt = Corporate action between present and time t
When there is uncertainty about the corporate action, as in case of closing of open offer, the
appropriate variable is the expected corporate action between present and time t. Hence,
Ft = [S – PV{E(CACt)}] * ert
Hence, if we look at differences in futures prices for two different expiries (e.g. 1-month and 2month futures), the trend in this difference can give valuable insights into the market’s
expectations.
D = Ft2 – F = S*ert2 – S*ert1 + [E(CACt2)] - [E(CACt1)]
The expected trend in D in the absence of any corporate action would be an almost stable small
positive value. However (as shown in Figure 4) keeping t1 and t2 constant and looking at
movement of D, we can see that the expected trend is deviated from in August 2008, where it
becomes a large negative difference.
This gives a clear indication where average market is placing the bets. The market expectation as
revealed here is for the deal closure to occur in August and hence the futures prices for August
end expiry are lower than for the previous month futures.
700
7000
600
6000
500
5000
400
4000
300
3000
200
2000
100
1000
0
0
01/01/2007
01/01/2008
Ranbaxy
01/01/2009
01/01/2010
NIFTY
Figure 3: Historical Stock Price Movement of Ranbaxy
5.0%
20
27‐Jan‐09
27‐Dec‐08
27‐Nov‐08
27‐Oct‐08
27‐Sep‐08
27‐Aug‐08
27‐Jul‐08
27‐Jun‐08
27‐May‐08
27‐Apr‐08
27‐Mar‐08
‐60
27‐Feb‐08
‐40
27‐Jan‐08
‐20
27‐Dec‐07
0
‐80
0.0%
‐5.0%
‐10.0%
‐15.0%
‐100
‐20.0%
‐120
‐25.0%
‐140
‐30.0%
‐160
Futures Price Difference
Relative to Spot
Figure 4: Difference between 1 and 2 month Futures Prices for Ranbaxy
700
4000
600
3500
3000
500
2500
400
2000
300
1500
200
1000
100
500
0
0
Ranbaxy
Daiichi
Figure 5: Stock Price Movement - Rabaxy and Daiichi Sankyo
700
70000
600
60000
500
50000
400
40000
300
30000
200
20000
100
10000
0
0
Open Interest
Price
Volumes
Figure 6: 1 Month Futures Price Movement and Key Develpments for Ranbaxy
700
18000
16000
600
14000
500
12000
400
10000
300
8000
6000
200
4000
100
2000
0
0
Open Interest
Price
Volumes
EXHIBIT C: RANBAXY
Exhibit C1: Key developments during the deal period
Announcement
Date
Development
11-06-2008
Newspaper reports about Daiichi making a bid for Ranbaxy
12-06-2008
News reports claiming Glaxo also looked at Ranbaxy earlier
13-06-2008
News reports claiming Pfizer may make counter offer for Ranbaxy
16-06-2008
Announcement for Daiichi's open offer for Ranbaxy shares to start on
August 8, 2008
18-06-2008
Ranbaxy settles with Pfizer, delays generic lipitor in US markets
25-06-2008
Ranbaxy Laboratories Limited Receives USFDA Approval For
Valganciclovir Hydrochloride Tablets
01-07-2008
FDA Refuses Approval For Ranbaxy Laboratories Limited's
Manufacturing Unit
04-07-2008
Newspaper reports state that Pfizer is Likely To Top Daiichi Offer For
Ranbaxy Laboratories Ltd By 20%
14-07-2008
News regarding long standing US probe to investigate if Ranbaxy has
violated federal laws that have resulted in its introduction of adulterated
and misbranded drugs in the United States
17-07-2008
Daiichi Sankyo Signs Agreement regarding Acquisition of Voting Right
in Ranbaxy Laboratories Limited (agreement on June 11, 2008 to
acquire more than 50.1% voting right in Ranbaxy through issues of new
shares and share warrants conditional on agreement during the
extraordinary meeting of shareholders scheduled for July 15, 2008)
21-07-2008
Dr. Reddy Quarterly results worse than expected
22-07-2008
UK court rejects fraud case against Ranbaxy
28-07-2008
Ranbaxy Launches generic ulcer drug in US
29-07-2008
Ranbaxy suffers quarterly loss due to currency impact
31-07-2008
Open offer delayed pending Indian regulatory approval
05-08-2008
Announcement for Open offer to start from Aug 16, to close on Sept 4
06-08-2008
Indian Government approves Ranbaxy Daiichi deal
26-08-2008
FIPB Clears the deal, further clearance required from Finance Ministry
and Cabinet Committee on Economic Affairs
29-08-2008
Denmark courts upholds Pfizer patents, delays generic lipitor by
Ranbaxy till Nov. 2011
02-09-2008
Ranbaxy stock drops ahead of open offer closing
04-09-2008
Open offer closes
16-09-2008
US FDA bans 30 Ranbaxy drugs
25-09-2008
US decided to not source AIDS drugs from Ranbaxy
03-10-2008
Cabinet approval of deal in India
08-10-2008
Ranbaxy shares advance on news that US drops motion in probe
17-10-2008
LIC sells off 6.91% in Ranbaxy
20-10-2008
Daiichi makes Ranbaxy subsidiary (acquired total of 52.5% through
direct sell, open offer, private placement and warrants)
31-10-2008
Ranbaxy posts quarterly loss
07-11-2008
Deal closure, Daiichi owns 63.92% of Ranbaxy
Exhibit C2: Evolution of Ranbaxy Shareholding Structure
RIL RPL Merger Deal Introduction An example of a stock swap deal is the RIL-RPL merger announced Feb. 27th, 2009. The swap
ratio for the deal was 1:16 and was announced on the following Monday on Mar. 2nd, 2009.
RIL press release (Exhibit 1) highlights the strategic synergies of the deal in detail. JM financial,
one of the leading investment banks in India acted as a transaction advisor to this deal. Their
deal memorandum (Exhibit 2) outlines details about RIL and RPL, transaction information and
deal rationale.
Calculating Market Implied Probability If an arbitrage position is executed by end of trading on March 2nd, whereby we buy one RPL
share at the closing price of INR75.3, simultaneously short 1/16th of RIL share at the closing
price of INR1225.65 and hold the position till deal closure (which occurred on Sept. 29th, 2009);
then, per share calculations are as follows:
Per share calculations and profit / loss evolution on the trading position (Figure 7) are as
follows:
Profit upon deal closure: INR 1.30
Loss upon deal fall-out: INR 2.32
Market implied probability of success: 64.1% [ p*(1.30) – (1-p)*(2.32) = 0 ]
8
6
4
2
0
03/03/2009
31/03/2009 28/04/2009 26/05/2009 23/06/2009 21/07/2009 18/08/2009 15/09/2009
-2
-4
-6
-8
Position PnL
profit
Figure 7: Evolution of Trading Positions in RIL-RPL Deal
Inaccuracy of Market Implied Probability As per the market implied probability, the deal closure seems highly suspect. However, this is
where analysis of the individual characteristics of the transaction comes in. It is important for an
arbitrageur to analyze the deal in context of other market information available. In this particular
case, for the markets, the merger of RIL-RPL was long anticipated and was almost a non-event.
Some of the points to consider in the analysis of the deal are as follows:

RIL has historically followed the practice of floating new projects to the investors and
later merging it with the parent company, thus using its market reputation to avoid
project risk and still gain the upside benefits, for e.g. In 1999, RIL floated a subsidiary
with the same name (RPL) which had set up Reliance Group’s first refinery at Jamnagar.
This first RPL subsidiary was merged into the parent in 2002.

The merger of the previous RPL was done after the project risk was over. The current
RPL had set up the group’s new refinery at Jamnagar. Moreover, the previous merger
was timed to take advantage of a falling market condition, in falling markets blue chip
stocks like RIL fare better than younger and smaller companies like RPL and hence this
greater gap in valuation of the two entities allows pricing at a swap ratio favorable to
RIL. Very similar market conditions have also existed since the start of 2009.

As can be seen in Figure 8, the swap ratio of 1:16 was the same as the average relative
trading prices of the two stocks during the current year. Figure 9 shows that the stocks
have always moved in tandem since the announcement. This pattern was similar for
more than a month prior to the merger announcement.

Figure 9 also shows that both the stocks have kept appreciating after the merger
announcement without any significant departure from the pattern which again gives the
indication that the merger was anticipated by the market
Figure 8: RIL RPL Swap Ratio
Figure 9: RIL and RPL Stock Price Movement
EXHIBIT D: RIL-RPL
Exhibit D1: RIL Press Release
Exhibit D2: JM Financial Deal Memo
Novelis Acquisition by Hindalco Introduction Hindalco, one of the biggest producers of primary aluminum in Asia, made Indian outbound
Mergers and Acquisition sore when it acquired, Atlanta based Novelis, a spin-off from aluminum
producer Alcan Inc. Hindalco became the largest integrated Aluminum producing and rolling
companies in India. The merger created one of the top 5 global integrated aluminum producers
with low-cost alumina and aluminum production capabilities combined with the high end
aluminum rolled production facilities.
Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, a $28
billion multinational conglomerate. Hindalco was one of the world’s leading producers of
aluminum and copper. Their aluminum units across the globe encompassed the entire gamut of
operations, from bauxite mining, alumina refining and aluminum smelting to downstream rolling,
extrusions, foils, along with captive power plants and coal mines. Hindalco was structured into
two strategic businesses aluminum and copper with annual revenue of US $2.6 billion.
Novelis was split from its parent company, Alcan Inc. (Alcan), the Canada-based aluminum giant
and set up as its subsidiary in January 2005. Novelis was the world leader in aluminum rolling,
producing an estimated 19 per cent of the world's flat-rolled aluminum products. Its customers
included major brands such as Agfa-Gevaert, Anheuser-Busch, Coca-Cola, Crown Cork & Seal,
Ford, General Motors. It was globally positioned, operating in 11 countries. The company
reported revenue of around $10 billion. The company recycled more than 35 billion used
beverage cans annually. The company was No. 1 rolled products producer in Europe, South
America and Asia, and the No. 2 producer in North America.
Strategic Rationale for the Deal This acquisition would be an excellent strategic move from Hindalco and A.V. Birla group.
Hindalco would be able to produce the low cost aluminum from its plants in India and export it
to plants of Novelis where it could be converted to Value-added products. The combination of
Hindalco and Novelis would establish an integrated producer with low-cost alumina and
aluminum facilities combined with high-end rolling capabilities close to customers27. The
complementary expertise of both these companies would create a strong platform for sustainable
growth and on-going success.
Hindalco’s rationale for the acquisition was to move up the value chain and start producing
value-added products and hence leverage the low cost advantage it had in aluminum production.
27
Source: Hindalco Industries Ltd. Annual Report Fiscal Year 2006-07
Further in a single deal Hindalco would become a global powerhouse from just a small Asian
player. Novelis was the global leader (in terms of volumes) in rolled products and provides
sheets and foils to automotive and transportation, beverage and food packaging, construction
and industrial, and printing markets.
Acquiring Novelis would provide Aditya Birla Group's Hindalco customers which are some of
the biggest brands in the world. It would increase the production capacity of Hindalco in the
rolled aluminum and would make it a global major. Further, Novelis deal would give Hindalco
access not only to high-end products but also to superior technology, Hindalco planned to triple
aluminum output to 1.5 million metric ton by 2012 to become one of the world's five largest
producers28.
After full integration, the joint entity would become insulated from the fluctuation of LME
aluminum prices. The deal would give Hindalco a strong presence in recycling of aluminum
business. As per aluminum characteristic, aluminum is infinitely recyclable and recycling it
requires only 5% of the energy needed to produce primary aluminum29. The revenue of Hindalco
was very much dependent on the aluminum prices and when the prices were high they would
make a larger margin, this was not the case with rolled aluminum business which usually had a
constant margin.
Novelis was a forced spin-off from Alcan when it succeeded in hostile takeover of Pechiney.
Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than
$500 million. After 2 years of operation and losses due to downturn, Novelis was sitting on a
huge debt and almost negligible equity with a debt to equity ratio of 7.23:1. Further, it had
entered into long term contracts with its customers to sell the rolled aluminum at a constant
price irrespective of the aluminum prices worldwide. This led to huge losses when the aluminum
and global commodity prices shot up around 2006-07. Hence it wanted a partner that can
provide low cost aluminum as well as equity support in coming years of losses due to fixed price
contracts till 2010.
Deal Structure The deal would be an all cash transaction on 10th February, 2007 wherein Hindalco would pay
Novelis shareholders $44.93 in cash for each outstanding common share. The whole deal would
come to USD 6 Billion which includes the $ 2.4 Billion of debt on the balance sheet of Novelis
that would be assumed by Hindalco.
28
Source: Livemint Lounge, Wall Street Journal, http://livemint.com/2009/02/18233951/Hindalco-turns-tosubsidiaries.html
29
Source: Novelis Inc. Form 10-K, Filed on March 01, 2007
The financing arrangement will be made with around USD 3.1 billion with recourse to Hindalco
and secured by Hindalco´s corporate guarantee for paying off the shareholders of Novelis as well
as non – recourse financing of USD 2.4 billion to be used to repay their existing lenders .
Ultimately, three banks viz. ABN-Amro Bank, Bank of America and UBS would back-stop the
funding requirement at the recourse leg for USD 3.1 billion while UBS and ABN-Amro Bank
would provide back-stop facilities of USD 2.4 billion that was to be used to pay off the existing
lenders. The balance of USD 450 million will be financed by the Company by way of infusing
equity / preferred stock / other securities in its wholly owned subsidiaries.
Arbitrage Opportunity As soon as the intensions of Hindalco became clear about all cash Novelis buyout, Arbitrageurs
grabbed this opportunity raising the price of the Novelis’ shares. Trading activity picked up even
before the announcement of the actual deal as traders started to speculate. The expected price of
the deal was around $45 and hence the prices jumped from $30 - $35 levels to $40 - $42 range30.
The buyout offer represented a 17% premium to the previous trading day's closing price and
almost a 50% premium to the share price on January 25, 2007 the day before Novelis made a
public announcement that it was in advanced stages of negotiation with potential buyers.
By the end of the day of the announcement i.e. 10th February, 2007, the stock price closed up
13.3% to $43.67 and continued to trade in this vicinity till the consummation of deal. Of course,
if the deal did not go through due to problems in getting shareholder approval or regulator’s
permit, the stock price would probably have returned to 2006 levels. However, if the deal went
through as proposed the arbitrageurs would have made a 3.05% return in the few months’ time
between deal announcement and consummation. This gap in case of Hindalco-Novelis was
February 10 to May 16 i.e. 11.84% annual.
Novelis was publicly traded in both US and Canadian markets. Prior to announcement of the
deal, the trading volumes remained roughly similar in both markets. But once the deal was
announced, the US trading volumes jumped significantly due to entry of arbitrageurs. The
disproportionate increase in the trading volumes of US indicates to presence of large arbitrage
positions being set up by US traders.
30
Source: Seeking Alpha, Indian Conglomerate buys Novelis, Andrew Corn
Novelis stock price movement
06‐Aug‐07
28‐Apr‐07
18‐Jan‐07
10‐Oct‐06
02‐Jul‐06
24‐Mar‐06
14‐Dec‐05
01/06/2008
22/02/2008
14/11/2007
06/08/2007
28/04/2007
18/01/2007
10/10/2006
02/07/2006
24/03/2006
14/12/2005
05/09/2005
EXHIBIT E: NOVELIS
Exhibit E1: Market data trends
Hindalco Share price
250
200
150
100
50
0
Hindalco stock price movement
Novelis Share Price
60
50
40
30
20
10
0
Novelis US and Canada trading volumes
N
Exhibit E2: Key developments during deal period
Announcement
Development
Date
Hindalco announces it is acquiring US-based Novelis in $6 Billion allJan 2, 2007
cash deal.
Jan 8, 2007
Jan 29, 2007
Jan 31, 2007
Feb 11, 2007
Feb 12, 2007
Hindalco and Novelis announce an agreement on price of acquisition
Analysts raise target on Novelis in expectation of deal between Hindalco
and Novelis
Aleris declared as a leader in the race to acquire Novelis
Hindalco announces the price for acquisition as $6 Billion including $2.4
Billion debt of Novelis
Hindalco shares down 14.5% after announcement of the deal size with
Novelis
Feb 14, 2007
Russia’s Rusal shows interest in Novelis
Mar 1, 2007
Novelis reports $ 275 million loss in its 2006 full year results
Mar 30, 2007
EU sets May 8 as deadline for Hindalco- Novelis deal
Apr 12, 2007
Hindalco announces allotment of shares/ warrants to raise equity for
Novelis purchase
May 8, 2007
EU passes Hindalco Novelis Deal
May 9, 2007
LIC increases its stake in Hindalco to 9%
May 10, 2007
Novelis shareholders approve the Hindalco deal
Corus Steel Acquisition by Tata Steel Introduction Tata Steel, an Indian integrated steel producer, created global headlines when it acquired the
Anglo-Dutch steel major, Corus Group Ltd. for $ 12.1 Billion, on January 30, 2007. Corus was
four times the size of Tata Steel and the largest steel producer of UK. The deal was roughly the
same size as the total outbound acquisitions by all Indian companies in the past five years
combined. The deal created fifth largest steelmaker of the world31. The deal took place months
after another Indian led Steel major Mittal Steel acquired Arcelor Steel for $ 33.1 Billion, creating
the world’s largest steel making company.
Tata Steel was 56th largest steel producer in the world with an annual crude steel production
capacity of 6.8 Million Ton Per Annum (MTPA) with revenue of around $ 5 Billion in 2006-0732.
Tata Steel`s Jamshedpur (India) Works had a crude steel production capacity of 6.8 MTPA
which was slated to increase to 10 MTPA by 2010. The Company also had proposed three
Greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh in India with
additional capacity of 23 MTPA and a Greenfield project in Vietnam.
Corus was Europe's second largest steel producer with annual revenues of around £12 billion ($
21.3 Billion) and a crude steel production of 18 MTPA, primarily in the UK and the
Netherlands33. Corus was a leading supplier to many of the most demanding markets around the
world including construction, automotive, packaging, and mechanical & electrical engineering,
metal goods, and oil & gas.
Strategic Rationale for the Deal Corus had steel production capacity of 18 million ton per annum. Combined with the existing
production capacity of Tata, it came to around 23.5 mtpa which would make the combined
entity fifth largest producer of steel in the world from Tata’s previous 56th position. This increase
in scale would give Tata immense increase in bargaining power with both suppliers and
customers.
Tata Steel was a very profitable entity but extremely small in size. To expand organically by 18
mtpa, would take at least 5-8 years and would entail immense execution risk. The cost of
establishing a production facility of size of Corus would be 65-70% more than the cost of
31
Source: World Steel Organization (http://www.worldsteel.org/pictures/programfiles/top_producers.pdf)
Source: Tata Steel Annual Report, Fiscal Year 2007
33
Source: Corus Group Plc. Website, http://www.corusgroup.com/en/company/about_corus/
32
acquisition34. The brand value that Corus had would be even harder to replicate in such a small
time interval. This means that the replacement value of Corus was very high.
Tata Steel was extremely localized in its market and would have to fight hard to get a place in the
European markets that were already competitive. Corus in one shot would make Tata Steel
capable of competing in the profitable European steel market. Corus had an extremely wide
distribution system already put in place in entire Europe. Most of the clients of Corus were
dedicated giving higher flexibility in pricing.
The technology needed for low end steel production is very different than what is necessary to
produce high end value added products. Tata Steel was not technologically advanced and needed
to get the advanced technology for value added products to increase the margins. Corus on the
other hand was equipped with highly sophisticated technology, had many patents and a research
facility and was already in to production of the value added products. The deal would allow Tata
Steel to get the technical knowhow and improve the steel production in its existing facilities and
the future Greenfield project that would come up.
In the third quarter ended September 2006, Corus had clocked an operating margin of 9.2 per
cent compared with 32 per cent by Tata Steel for the third quarter ended December 200635. In
effect Tata Steel was taking over a business with much lower operating margin which provided a
lot of scope for improvement in short term. Tata Steel had high Tobin’s Q and it was taking
over a company with low Tobin’s Q and hence would create a higher value than the reverse
takeover. In the long run, there would be considerable scope to restructure Corus' high-cost
plants at Port Talbot, Scunthorpe and the slab-making unit at Teesside. The employee costs of
Corus were also much higher than Tata Steel; this too could be an area of restructuring in long
run36.
From Corus’s point of view, the deal was essential to reduce its billion pound debt load. This
would give it flexibility to counter the dynamic scenarios and future slowdowns. Further, Tata
Steel also had access to cheaper Iron ore which would be an added advantage to Corus. Tata
Steel had a well-developed distribution network in developing countries. Corus would get a
market for its value added products through this distribution system. Further all production
facilities of Corus were old and had high cost of production and employees.
34
Source: “Tata - Corus: Visionary deal or costly blunder?” - http://www.domainb.com/companies/companies_t/tata_steel/20070201_tata_corus.htm
35
Source: Financial results of Corus Group Plc. and Tata Steel, Fiscal year 2006-07
36
Source: Hindu Business Line
Deal Structure Tata Steel proposed to infuse USD 4.1 billion as equity to part finance the transaction37. The
equity would comprise of USD 700 million from internally generated cash, USD 500 million of
external commercial borrowings, USD 640 million from the preferential issues of equity shares
to Tata Sons Ltd. in 2006-07 and 2007-08, USD 862 million from a rights issue of equity shares
to the shareholders, USD 1000 million from a rights issue of convertible preference shares and
about USD 500 million from a foreign issue of equity-related instrument (Exhibit 3).
Issuer
Tata Steel UK
Tata Steel Asia (Singapore SPV)
Tata Steel Limited
Tata Steel Limited
Tata Steel Limited
Tata Steel Limited
Tata Steel Limited
Tata Steel Limited
Instrument
Non-Recourse Debt
Debt (Quasi equity)
Internal cash accruals
External Commercial
Borrowing
Preferential Issue to
Tata Sons Ltd.
Rights issue of Equity
Rights Issue of
Convertible Preference Share
Equity related instrument
Contribution (in $ Billions)
6.14
2.66
0.7
0.5
0.64
0.862
1
0.5
At the Board Meeting held on 17th April, 2007, Tata Steel’s Board approved the long term
funding arrangement for the acquisition of Corus as per details given above.
Arbitrage Opportunity As soon as the intensions of Tata Steel became clear about all cash leveraged buyout of Corus
Group Plc., Arbitrageurs pounced at this opportunity raising the price of the anticipated buyout.
Trading activity picked up even before the announcement as speculation of such a takeover
permeated the securities markets. The expected price of the deal was around 455 pence on
October 17, 2006.
The buyout offer represented an 11% premium to the three month average and almost a 25%
premium to the share price on September 25, 2006, the day before Corus made it public that it
was in advanced stages of negotiation with potential buyers.
On November 19, 2006, Brazilian steel company CSN launched a counter offer for Corus at 475
pence per share valuing the company at $ 8.4 Billion. This made it clear to the arbitrageurs that a
bid war is expected and they raised the price of shares to 495.5 pence (higher than the actual bid)
(Refer Exhibit 5 for Corus Group Plc Share price). The counter bid by CSN lead to increase in
37
Source: Tata Steel Annual Report, Fiscal Year 2007
bids sequentially by Tata and CSN to 500 pence and 515 pence subsequently on December 11,
2006 (For a detailed timeline refer to Exhibit 6).
By the end of the day of the announcement of final deal at 608 pence i.e. January 31, 2007, the
stock price closed at 607 pence and continued to trade in this vicinity till the consummation of
deal. Of course, if the deal did not go through due to problems in getting shareholder approval
or regulator’s permit, the stock price would probably have returned to September 2006 levels.
However, if the deal went through as proposed the arbitrageurs would have made a 67.03%
return in the few months’ time between deal announcement and consummation. This gap in case
of Tata Corus deal was October 20, 2006 to January 31, 2007 i.e. 241.3% annual (Refer Exhibit 7
for the actual profit and loss in case an arbitrage position was set up).
EXHIBIT F: CORUSS STEE
EL
Exhib
bit F1: Acquisiti
A
ion Finaancing (Tata
(
Stteel AR FY08)
Financin
ng Structuree
The finan
ncing structuure of the Co
orus transacttion has been
n reorganizedd to achieve fiscal unity in
i
the Netheerlands and consequent
c
t efficienciees.
tax
The finan
ncing structure of the Corrus transactio
on as on datee is given bellow:
Funding
g Structure
The bulkk of the finan
ncing for the Corus acquiisition has no
ow been com
mpleted with
h all the bridgge
funding having
h
been paid off thrrough a mix of debt, equuity and interrnal accruals. The fundin
ng
structure as on 31st March,
M
2008 is
i as follows:
The sourcces of the co
ontribution to
owards equityy capital inclluded the folllowing:

T Steel Asiia Holdings Pte. Ltd. andd Tulip UK Holdings (N
Tata
No. 1) Limiteed drew dow
wn
G 2.21 billlion of bridgge loans. Theese loans werre repaid usin
GBP
ng monies in
nfused by Taata
Stteel Limited out of equitty issues, CA
ARS and loan
ns as describ
bed below an
nd also out of
o
in
nternal generration

T Company had allotteed to Tata SSons, on a preferential
The
p
b
basis,
27,0000,000 ordinarry
sh
hares (at a prrice of Rs. 516 per share)) and 28,5000,000 warrantts to subscrib
be to an equual
am
mount of ord
dinary sharess

Tata Sons fully exercised the warrants and 28,500,000 ordinary shares were issued to Tata
Sons at a price of Rs. 484.27 per share, for total proceeds to the Company of Rs. 1,380
crores

The Company issued USD 0.875 billion of 1% Foreign Currency Convertible Alternative
Reference Securities (“CARS”). The CARS accrue interest on the outstanding principal
amount at a rate equal to 1% per annum and are classified as unsecured debt on the
balance sheet of the Company. Between 4th September, 2011 and 6th August, 2012, each
security is convertible at the option of holder of the security, at a conversion price of Rs.
758.10 per share into a Qualifying Security issued by the Company. The Company must
redeem all outstanding CARS principal amount together with accrued and unpaid interest
no later than 5th September, 2012

The Company entered into a loan agreement with the State Bank of India and other
banks for Rs. 9,500 crores. In January 2008 Rs. 9,000 crores was repaid with proceeds
from the Company’s Rights Issue and Rs. 500 crores was repaid on 28th February, 2008

In November 2007, the Company made a rights issue offering to shareholders in India,
(i) 1 ordinary share for every five ordinary shares at a price of Rs. 300 per share and (ii) 9
cumulative compulsorily convertible preference shares (“CCPS”) for every 10 ordinary
shares at a price of Rs. 100 each. A total of 121,611,464 ordinary shares and 547,251,605
were allotted pursuant to the rights issue. Every six CCPS issued will be automatically
converted into one ordinary share of the Company on 1st September, 2009. Total
proceeds from the rights issue aggregated Rs. 9,121 crores. In January 2008, the
Company used the proceeds from the rights issue to repay the loan from the State Bank
of India described above
In addition, the non-recourse long term debt (at Tata Steel UK) was syndicated. GBP 3.12 billion
of Bridge Funding was drawn in full into Tata Steel Netherlands as borrower. Based on its
assessment of the appropriate quantum of debt that could be serviced by Corus, the Company
restructured the initial higher cost inflexible leveraged debt financing consisting of loans and
bonds. This even involved a change in the financing banks. The replacement financing package
consisting solely of lower cost pre-payable corporate term loans offered substantial savings and
benefits to the company. This was a GBP 3.670 billion senior facility consisting of multiple
tranches of term loans and a GBP 0.5 billion five year revolving credit facility. These facilities are
secured by the assets of Corus.
Rs. crores USD billion Equity Capital from Tata Steel Ltd. 17,850 4.10 Quasi ‐ Equity / long term funding 11,570 2.66 Total Equity and Quasi‐Equity contribution (a)
29,420 6.76 Non‐recourse long‐term debt at Corus (b)
26,730 6.14 Total (a+b) 56,150 12.90 Exhibit F2: Timeline of events during the deal
Announcement
Date
Development
25-9-2006
Corus announces that it is in advanced stage of negotiations with
potential buyers
17-10-2006
Tata Steel announced that it had agreed to buy 100% of Corus at 455
pence per share in an all cash deal, cumulatively valued at GBP 4.3 billion
(USD 8.04 billion)
19-11-2006
CSN, a Brazilian steel company, launched a counter offer for Corus at
475 pence per share, valuing it at $8.4 billion
11-12-2006
Tata increased its offer to 500 pence, which was within hours trumped by
CSN's offer of 515 pence per share, valuing the deal at $ 9.6 Billion. The
CSN offer would be implemented by way of a scheme of arrangement
and was subject to a pre-condition that Corus Shareholders reject the
Tata Scheme or the Tata Scheme is otherwise withdrawn by Corus or
lapses. The Corus board promptly recommended both the revised offers
to its shareholders
12-12-2006
Standard and Poor’s puts Tata Steel’s debt rating at ‘BBB’ negative watch
10-12-2006
UK Panel on Takeovers and Mergers announced that the last date for
each of Tata and CSN to announce revised offers for the company,
should they wish to do so, is 30 January 2007. They also warned that it
would begin an auction procedure if the two remained in competition
31-12-2006
Tata Steel won their bid for Corus after offering 608 pence per share,
valuing Corus at $11.3bn
Exhibit F3: Stock Price Movement
600
560
520
480
440
400
Tata Steel Stock price movement
700
600
500
400
300
200
100
Share Price
Offer Price
Corus Group stock price movement
28/Apr/07
09/Mar/07
18/Jan/07
29/Nov/06
10/Oct/06
21/Aug/06
02/Jul/06
13/May/06
24/Mar/06
02/Feb/06
‐100
14/Dec/05
0
Teaching Notes The theory described in the beginning of this document explains all that the student needs to
know about merger arbitrage and risk arbitrage in general to assimilate and appreciate the
material presented after that. The data and exhibits presented as part of the case material
provides all the information required for decision making in such a situation and to answer other
questions posed in the discussion material.
We have written the studies as caselets rather than full cases. The approach is similar to other
caselets on applications of financial futures.38 This approach enables an illustration of a
variety of special situations. We consequently have about 20 minutes of discussion for each
caselet. The instructor can either pick a subset of cases, or allow the exposition to span two
sessions.
One of the cases, RIL-RPL merger is structured as case discussion material for class room
discussion and students’ perusal, while the other cases have all been structured as case study
material which tries to bring forth several different nuances in risk arbitrage situations.
In addition to the conventional teaching notes, we have also written, the evolution of a typical
arbitrage situation on the arbitrage trading desk of an Investment Bank for the ICICI bank case.
The discussions between various parties are hypothetical but lay out the various internal and
external parties which co-ordinate to execute a trade, as well as the jargon used on the trading
floor in such situations. We have also shown a sample calculation from building such a position.
ICICI Bank Partly Paid Issue
Suggested Questions i.
Explain clearly the mechanics of the arbitrage by which prices of the partly paid
securities should converge to their theoretical value. Calculate these values assuming
money market rates of 6% and borrow fees of 3.5%. ( There were no interim
dividends between the listing and call dates )
38
Scott and Durdan, 1986.
ii.
Assume transaction costs at 10 bps of notional value. Compute bands on the prices
of partly paid securities in the presence of transaction costs. Were the observed
prices for the partly paid securities within these bands?
iii.
Discuss why partly-paid prices were initially close to the theoretical values and then
diverged steadily. Calculate the holding period return for an investor holding the
partly paid shares till 31 Oct 07.
iv.
Institutions were not allowed to buy partly paid securities in the primary offering, but
were allowed to purchase these in the secondary market. What advantages might this
confer?
v.
At this time, ICICI’s Foreign Institutional Investor (FII) ownership was close to the
Reserve Bank of India’s mandated holding limits. What additional risks might this
introduce?
Hypothetical Evolution of the ICICI Bank Case Let’s look at how this special situation would evolve on a typical large investment bank’s trading
floor after a hypothetical trader having the information which has been presented till now would
take a trading call. Remember, there are no 'right' or 'wrong' answers - hindsight's 20/20, and
mistakes are the school fees a rookie trader pays.
Morning of 3 Sep
Broker: "Morning mate - how was expiry?"
Trader: "Not too bad - managed to hang in there. What's kicking?"
Broker: "Well we have this special situation on ICICI Bank - the partly paids ..”
Trader: "Oh yes - was tied up with my rolls so took my eye off that one. Where's the spread?"
Broker: "Fifteen rupees cheap - something I can do for you there?"
Trader: "Nothing for now, but will get back to you"
The trader opens up his Reuters 3000xtra workstation, and sets up a spreadsheet to monitor live
feeds of the prices of the ICICI common stock and partly paid security, and calculate the spread
in realtime. He walks over to the security lending desk.
Afternoon 3 Sep, after trading hours
Trader: "Mate got some icky bank?"
Stock loan: (checks) "say 200,000 - want me to hold it for you?"
Trader: "Stable? Can we term it (means whether the stock can be borrowed for a fixed prespecified term)?"
Stock loan: "Yeah, but terming it will cost you. Can source more at 250"
Trader: "Thanks - I'll get back to you"
The trader Walks back to his desk, and calls compliance
Trader: "Hi - you know this ICICI FPO - Just checking it is all right for FIIs to buy the PP”
Compliance: "I imagine so - I'll check. But as you aware from the restricted list, you need to
monitor the FII capacity"
Trader: "So if I buy the partly paid, will there be any regulatory restrictions to conversion?"
Compliance: "Very much doubt it. I'll get back to you."
Some minutes later:
Compliance: "Ok you are good to go - are you buying today?"
Trader: "No, just looking"
Compliance: "Ah. In that case, please recheck the restricted list on the date you enter, and call if
you have any questions."
19 Sep.
Trader sees the spread at 422 - 37 INR cheap. Calls out to the stock loan desk
Trader: "Hey HW, what do you have on ICICI?”
Stock loan: "Have loads at 200 bps. How much do you want?"
Trader: "Let’s pull down two hundred thousand shares today"
Stock loan: "Ok done"
Trader checks restricted list and calls his broker.
Trader: "Sell 200k ICICI bank shares while buying ICBK_p.NS (ticker for ICICI partly paid
issue) at 420 Rs under"
Broker: "That will be tough to work - the spread on screen is 410, would you like to get done
there?"
Trader: "No just keep trying at -420"
Broker: "Ok"
19 Sep, close of day
Broker: "Ok we sold 70,000 shares of icici at 962.1 and bought 69,990 shares of icbk_p.ns at
542.05 - shall we take the extra 10 shares in our book?"
Trader: "No let it be - I expected more to get done"
Broker: "It was very tough - best dealer on it, we were 1/3rd volumes. Can we continue to work
this tomorrow?"
Trader: "Possibly - I'll get back to you tomorrow"
20 Sep morning
Broker: "Shall we continue to work the order? I think we should be more aggressive - this won't
be around forever"
Trader: "Do 130k at -420 over the day"
On the phone to IDB
Trader: "Mate seen anything on Dec 07 TRS on ICBK.NS?"
Interdealer broker: "Nothing recently - you want to show something"
Trader: "No I'm good"
Back to stock loan
Trader: "How much icky can you get us ?"
Stock loan: "Lemme check - indicative size?"
Trader: "300k shares?"
Stock loan: "so 500k in all? lemme check "
(Later)
Stock loan: "Ok can get it to you at 200 - discount for size"
Trader: "Thanks - can we term it to Dec 1?"
Stock loan: "Yeah no problem"
Trader: "Swell. You guys are amazing"
(Close of business)
Broker: "We got another 4k done at your levels"
Trader: "only?"
Broker: "Market only traded 40k shares Sir - we were 10% of volumes"
Trader: "Ok"
21 Sep
Trader instructs "Go up to 1/4 volume - finish at -420" ; gets nothing done on 21st (spread not
really there)
24 Sep
Spread blows out to -430 (40INR cheap) : the rest of the 200k shares get done. Then another
broker calls
Broker2: "I have a client wanting to sell 50k icbk partly paids - you a buyer?"
Trader: "At the right price"
Broker2: "Client willing to sell at 530"
Trader: "Mine"
Broker2: "Thanks -I'll report the cross"
Calls broker: "Sell 50k icbk.ns at 990 - get done quickly"
Broker: "Righto"
Few minutes later: All done at 990
In this manner the trader builds up a position of 500,000 shares (10 mn USD) at discounts
between 30 and 45 INR to fair value over the next few weeks, at an average discount of 38 INR.
He has a meeting with his desk head to discuss the trade.
Trader: "Yeah, the msci recomp went off smoothly. And as we talked earlier, there's this ICBK
partly paid spread I've been building up, selling the common against the partly paid. Guess we’ll
make half a buck on it."
Desk head: "Yes saw your note - why do you reckon it's trading that cheap? Is there something
you didn't pick up?"
Trader: "Well, I'm pretty sure on this one. Don't really have an answer, but the sellers of the
partly paid are unsophisticated retail guys. I guess we need to look for some behavioral
explanations. Some prospect theory model where retail guys evaluate joint outcomes - making
money on their position makes them happier to fork out the liquidity discount. "
Desk head: <grins> "Maybe - sounds like psycho mumbo-jumbo to me, but guess you know
what you are doing - are you not putting on more because of liquidity, stock loan, or the risk
management guys?"
Trader: "I think this is what I'm happy with - the partly paid is trading some 100k shares a day
and the common stock some 3 million shares a day - mainly worried about recall risk"
Desk head: "Fine."
15 Nov.
The trader uses part of the net proceeds to pay the call amount. A few days later, he receives
fully paid shares, which he returns to the stock loan desk to settle his outstanding borrow.
Simplified profit/loss calculations
A.
B.
C.
Number of shares
Call amount per share
Total call amount (AxB)
500000
390
19,50,00,000
D.
E.
Gross spread
Proceeds (AxD)
428
21,40,00,000
F.
G.
H.
I.
Average Price of ICBK.NS during trade
Average Borrow fee (in basis points)
Number of months
Lending fee [(AxFxGx2)/(10000x12)]
1124.6
220
2
20,61,767
(We assume for simplicity that the short position on ICBK.NS is collateralised with ICBK_p.NS and the net
proceeds; and that the interest nets out)
J.
K.
L.
M.
Average discount (D-B)
Profit (AxJ)
Commissions [(2xF-D)xAx10/10000]
Net profit/loss (K-I-L)
The reason for price convergence between partly paid and fully paid shares is the essence of
arbitrage itself. With two different instruments of similar economic value trading at disparate
prices, the market participants would sell (or short) the more expensive instrument and buy the
cheaper instrument. This practice by a large group of investors would change the demand-supply
equilibriums of both securities by increasing the supply of the expensive security (thus reducing
its price) and the demand of the cheaper security (thus increasing its price). This would continue
till the prices of both securities reflect their true economic values. The mechanism of executing
arbitrage is described in the text and calculations above.
Theoretical price for partly paid shares can be calculated as the difference between spot price of
fully paid trading stock and the present value of INR390 due at maturity.
Ppp= Pfp – PV(390)
The upper and lower price bands based on a transaction cost of 10 basis points (0.1%) would
then be calculated as Ppp*(1+0.1%) and Ppp*(1-0.1%).
The calculations are plotted in the graph below assuming a continuously compounded market
risk free interest rate of 6% for calculating the present value of future payments.
38
1,90,00,000
910600
1,60,27,633
1000
900
800
700
600
500
Close Price
Lower band
13/Nov/07
06/Nov/07
30/Oct/07
23/Oct/07
16/Oct/07
09/Oct/07
02/Oct/07
25/Sep/07
18/Sep/07
11/Sep/07
04/Sep/07
28/Aug/07
21/Aug/07
14/Aug/07
400
Upper Band
As we can see here, the band size is quite narrow because of low transaction costs, and the partly
paid shares continuously trade below the theoretical price band except in the beginning of the
period immediately after the issue.
The reason for this is the investor’s willingness to pay the liquidity discount to the liquidity
provider (arbitrageur) after they have made initial profits. The primary market offering of partly
paid shares for targeted at the retail investors and these investors offloaded the shares to the
arbitrageur after making some profits from holding the stock.
It’s the participation of institutional investors in the secondary market which provides constant
liquidity in the instruments due to the market making activities of FI. The liquidity in the
secondary markets makes the primary markets more efficient by increasing the attractiveness of
primary offerings to investors since they can be confident of an exit route through the secondary
markets.
Like many other countries, India has regulatory limits on FII share holding in any financial
institution (and for some other industries as well, the full list of companies and FII shareholding
limits keep changing and is continuously updated by RBI39). The risk in partly paid securities
arises from the regulator’s interpretation of the voting rights in the partly paid stock for the
purposes of calculating the cumulative FII holding. Hence, if the FII investment ceiling is
calculated only on the basis of fully paid shares, then if the FI holding the partly paid shares tries
to convert them to fully paid shares at some date, the regulator might deny that due if the ceiling
is getting breached. Hence, the trader needs to ensure that such a event will not occur before
entering the trade. For this, the FI trader would clarify the issue’s regulatory interpretation from
39
http://www.rbi.org.in/scripts/BS_FiiUSer.aspx
the company itself, from the regulator if possible and would have to get the clearance of FI’s
own internal control and compliance officials.
Tata Motors DVR Issue Suggested Questions 1. Why do you think the A shares traded the way they did?
2. Underwriters should have deep pockets. Discuss this statement in the light of JM
Financial’s actions in this case.
3. What mechanisms do family owned business groups employ to ensure the survival of
group companies?
How the case unfolded A long holder of the stock on the ex-date, would be entitled to subscribe to the rights. His
subsequent actions would depend on who he is. A right is a call option, which could either
finish in the money or out of the money. An option is worth money, so after the ex-date, the
stock price would decrease by the value of the rights offering.
An investor averse to risk would delta-hedge his rights, and seeks to capture the gamma over the
life of the option (till the subscription date). On the other hand, if a trader holds a passive
position on Tata Motors as part of a well-diversified MSCI index basket hedging an ETF, his
concern is how the index would be adjusted for the rights. Typically, the index is smoothed using
a price adjustment factor, and his natural course of action would be to not delta-hedge the
option.
At the time of the offering, MSCI computed its PAF (price adjustment factor) using the
following logic:
New PAF = Theo-Cum price / Ex price
Where the Ex-price is the market price on the ex-date and the Theo-Cum price is defined
as [(Ex price x (shares before + shares issued) - subscription price x shares issued)/
shares before]
On 16 Nov 2009, after a consultative process, MSCI changed its PAF formula to:
If subscription price is greater or equal to Cum price then PAF=1 else [(Ex price x
(shares before + shares issued) - subscription price x shares issued)/ shares before] / [Ex
price]40
On Oct 20 2008, the closing date of the rights issue, the share price of Tata motors was 244 –
way below the subscription price of 340 INR for the common share and 305 INR for the DVR
share. Consequently, the subscription rights were not exercised by the average investor and the
promoter group stepped in as the buyer of last resort. Indian family groups typically engage in
such behavior and the implicit expectation of bailouts that help companies survive acts as a
reassurance to investors in group companies. The DVR issue was underwritten, and a portion of
the issue was picked up by the investment bank.
The stock price continued to decline, and reached a low of INR 131.1 on 5 Feb 09. Assuming
the DVR was worth the same as the common stock and neglecting any underwriting discounts,
the underwriter was looking at a MTM loss of INR 1.71 bn (42.7 mn USD) against its purchase
price of INR 305. But, being the principal (essentially the sole) holder of the DVR shares, it
needed favorable market conditions to sell its position without further depressing prices. It could
possibly have tried to hedge its risk by short selling the common stock or hedging with futures,
but the futures were not very liquid and the borrow was difficult to find. It is therefore possible
the underwriter chose not to hedge its position.
Markets recovered, and the losses were reversed. By 27th August 09, DVR prices had recovered
to INR 345, and 200,000 shares were traded, most likely by the underwriter selling to a fund.
1.75 million shares were traded the next week, at DVR prices of 400 ( a discount of 100 INR).
The underwriter was happy to pay the liquidity discount to reduce its risk. As to why it waited
for prices to rise before reducing its holding, a fringe discipline called behavioral finance suggests
that investors are reluctant to book losses; and also that they are more willing to pay a liquidity
discount when they are making a profit since they focus at the joint rather than individual
outcomes (i.e., they add up the profit on the trade and the liquidity discount and treat them
together). The top 10 trading days are listed below – They suggest that the size of the liquidity
discount, in absolute as well as proportional terms, increases with profits:
Symbol
40
Close
Price
TATAMTRDVR
365.1
Total
Traded
Quantity
1,176,416
TATAMTRDVR
437.3
TATAMTRDVR
428.75
Turnover in
Lacs
close
INR
spread
pct
spread
4275.039847
489.7
-124.6
-25%
997,919
4384.135123
607.95
-170.65
-28%
601,454
2579.267617
558
-129.25
-23%
http://www.mscibarra.com/news/pressreleases/archive/20091109_pr.pdf
TATAMTRDVR
446.45
3,471,455
15479.22588
621.6
-175.15
-28%
TATAMTRDVR
467.85
4,778,589
21465.22837
619.15
-151.3
-24%
TATAMTRDVR
480.55
1,335,669
6380.603035
634.85
-154.3
-24%
TATAMTRDVR
492.1
931,257
4557.193672
646.45
-154.35
-24%
TATAMTRDVR
507.25
496,344
2510.844405
703
-195.75
-28%
TATAMTRDVR
505.3
595,441
3003.133994
826.45
-321.15
-39%
TATAMTRDVR
511.35
538,636
2733.278881
813.3
-301.95
-37%
Theoretical background as per behavioral finance: Following discussion presents one way to look at the situation. We can look at the development
of the situation as a dynamic matching game of demand and supply. More formally, the supplier
in this case is a sole investment bank (IB), whose utility can be described by the following
formulation:
Uib = f(theoretical profit, liquidity discount)
Where f’theoretical profit(.) > 0 and f’liquidity(.) < 0; these constraints just underscore the idea that utility
increases with profits and decreases with increasing liquidity discount.
Where,
Liquidity discount = g(theoretical profit),
Theoretical profit = Implied price of DVR – Entry price,
Implied price of the DVR is the fair economic value of the DVR in relation to the trading price
of the common stock. This essentially means that since the DVR and the common stock derive
their value from the same asset base hence their equilibrium prices would be related to each
other and deviation from this equilibrium pricing would provide arbitrage opportunities which
would bring the prices of the two instruments back to equilibrium prices.
Implied price of DVR = Trading price of Tata Motors common stock + price value of additional
0.5% dividend – value of additional control rights available to common stockholder
The relationship between realized (actual) and theoretical profits from holding and selling the
DVR is:
Theoretical profit = Realized profit + Liquidity discount
On the demand side, demand can be by long term investors or short term arbitrage traders.
Demand functions for both could be formulated as follows:
Dlong-term = g(fundamental value, size of discount)
Darbitrageur = h(size of discount, funding or hedging cost)
Total demand in the market will be the sum of demand by both investor groups.
200
150
100
50
profit
0
-250
-200
-150
-100
-50
-50 0
50
100
150
200
250
-100
-150
-200
-250
-300
-350
spread
100%
80%
60%
pct profit
40%
20%
0%
-80%
-60%
-40%
-20%
-20%
0%
20%
40%
60%
80%
-40%
-60%
pct spread
Usually underwriters are responsible for price stabilization post offering, for this reason
underwriters need to have the balance sheet strength which is needed in order to continuously
buy/sell shares of the offer or keep them on their own books for some time if needed.
As described in this case, JM financial had to keep the stock on its books for about a year and
sustained large mark-to-market losses in this process. JM’s actions were not driven by
contractually set market stabilization commitments in this case but because of lack of buyers in
the market at that time.
Family owned conglomerates in India use their controlling holding in group companies to
finance some of their business whenever the need arises. One way to do this is to sell some of
the holding in one group company (say Tata Steel) to finance a large cash need of some other
group company (say Tata Motors) by routing the cash from holding company into the needy
subsidiary. Another way to achieve the same result is by using the controlling power in subsidiary
companies to invest in each other as and when there is a business requirement.
Partly due to this reason investors are more comfortable to invest in the conglomerates
individual business because they know that if the business gets into trouble, it will be bailed out
by the other businesses of the group even though all these business are essentially public
companies with separate shareholders.
One way to understand the trading behavior of A shares is to look at it from the prospect theory
point of view. Because the investors holding the A shares have made profits from continuing
price convergence of the two share classes, they would be willing to sell of the shares before full
convergence (essential idea being after making profits, investors are willing to pay the liquidity
discount to the arbitrageur in exchange for his services as a liquidity provider in special situations
in the market).
The two graphs presented above show the observed relationship from the market data between
realized profits (X-axis) and liquidity discount (Y-axis) in absolute and percentage terms. The
data supports the results from another study41 which proposes behavioral finance concepts to
understand the issue of under pricing in IPOs. This study puts forth the idea that when faced
with two related outcomes people have a tendency to look at them separately or as one
depending on which view makes them feel better. Hence two gains are viewed as segregated
outcomes; two related losses will be viewed as one integrated outcome and for a gain and a loss,
whether an investor feels better by integrating or segregating depends on upon their magnitudes.
Figure 10: Regions of Integration and Segregation of Two Different Outcomes by an Investor
41
Why don’t issuers get upset about leaving money on the table in IPOs?; Tim Loughran and Jay R.Ritter
RanbaxyDaiichi Sankyo Deal
Suggested Questions Given the information available at the time of announcement, will you enter into an arbitrage
position, what trade would you need to make and how will it be profitable?
Discussion Material On June11, 2008, given the information available, we can expect the deal to complete in August
and even if all shareholders participate in the open offer, we can expect to exit the position at
INR577.5. Since the current stock price is INR561, we can ex-ante expect a profitable trade and
hence build an arbitrage position by going long Ranbaxy stock. Since this is an all cash deal,
hence, there is not short selling possible in this trade, however, to protect against market
movement, a trader might want to short sell the broad market index, if he anticipates a negative
market move which could lead to falling prices across the market.
The hypothetical profit/loss evolution till deal closure as a result of building the position as
described above is shown in Figure 11.
800
600
400
200
0
11/06/2008
‐200
11/07/2008
11/08/2008
11/09/2008
11/10/2008
‐400
‐600
Ranbaxy Stock Price
Buy Price
Profit/(Loss)
Figure 11: Ranabaxy Profit/Loss Evolution on a Per Share Basis
Hence, as it turns out that the trade becomes significantly unprofitable. This occurred because
Ranbaxy stock price kept going down post deal announcement. This happened due to 2 reasons.

Adverse news coming to the market about Ranbaxy (Exhibit 1)

General market conditions during the crisis leading to a fall in broad market index
A trader can hedge against market movement in building an arbitrage position by delta hedging
using the market index (NIFTY) as a proxy for broad market conditions.
Given Ranbaxy’s beta of 1.18, a trader can insulate the position against market conditions
through the following trade.
If amount invested in long position in Ranbaxy is X, then short sell the index for the same
amount X after adjusting for the stock beta. Hence, short sell index to the amount of X*beta.
In this case, since the acceptance ratio is 30.68% (=20%/65.18%), so the actual amount at risk is
69.32% of the total and hence the hedging amount will be 69.32% of X*beta.
The profit/loss evolution from executing this hedged trade is shown in 12.
300
200
100
0
11/06/2008
‐100
11/07/2008
11/08/2008
11/09/2008
11/10/2008
‐200
‐300
‐400
‐500
Proift on Long Ranbaxy
Profit on short Nifty
Total Profit/Loss
Figure 12: Profit/Loss Evolution from a Hedged Ranbaxy Position
Hence, we can see that this trade is still unprofitable. This is because the stock specific negative
news events have made Ranbaxy prices drop significantly more than the market. The arbitrage is
thus not entirely risk-less (hence the name - risk-arbitrage). A profitable opportunity at the time
of setting up the position can become loss making as events unfold in the market which cannot
be expected up front.
NovelisHindalco Deal
Suggested Questions Given the information available at the time of announcement, will you enter into an arbitrage
position, what trade would you need to make and how will it be profitable?
Discussion Material On February 10, 2007, Hindalco announced their agreement to buy Novelis in an all-cash deal at
$44.93 per share. Hindalco has made its intensions clear of finishing the transaction within the
first quarter of fiscal year 2007-08. This would mean an investment horizon of about 3 to 4
months if the negotiations fructified and all regulatory approvals could be obtained. Since
Novelis had already announced on January 25, 2007 that it was in advanced talks with potential
buyers, the markets had already factored in an increase in share price from $30 - $35 to $40 $42. The Novelis shares on February 10 traded in vicinity of $43.67. Since the current stock price
is lower than the bid price, we can a-priori expect to profit from the trade. The position to be
assumed here is to go long Novelis shares and wait for the deal to consummate and get the cash
from the acquirer.
described above is shown in 13.
20
15
10
5
Acc PnL
Target PnL
Gain
Loss
Figure 13: Profit/Loss Evolution on a Per Share Basis of Novelis
07/06/2007
18/05/2007
28/04/2007
08/04/2007
19/03/2007
27/02/2007
07/02/2007
18/01/2007
29/12/2006
‐5
09/12/2006
0
Hence, ass it turns outt post-facto that
t the tradee becomes prrofitable. On
ne interestingg thing to note
in the deeal was that Novelis wass publicly traaded in both
h US and Canadian marrkets. Prior to
t
announceement of thee deal, the trrading volum
mes remained
d roughly sim
milar in both
h markets. Buut
once the deal was an
nnounced, th
he US tradin
ng volumes increased
i
siggnificantly duue to entry of
o
proportionatee increase in the trading volumes
v
of US
U indicates to
t presence of
o
arbitrageuurs. The disp
large arbiitrage positio
ons being set up by US traaders.
Figurre 14: Novelis Trading Volu
umes in the US
S and Canadiaan Markets
As the deal went thrrough as pro
oposed the aarbitrageurs (assuming
(
th
he above possition) made a
return off 3.05% in th
he few month
hs’ time betw
ween deal an
nnouncementt and consum
mmation. Th
his
gap in casse of Hindalcco-Novelis was
w Februaryy 10 to May 16 i.e. 11.84%
% annual.
TataCo
orus Deal
Suggested Questio
ons Given th
he informatio
on available at
a the time of
o announceement, will yyou enter into
o an arbitragge
position, what trade would
w
you neeed to make and
a how willl it be profitaable?
Discussion Material On October 17, 2006, Tata announced their agreement to buy Corus in an all-cash deal at 455
pence per share. Tata Steel has made its intensions clear of finishing the transaction in the
current fiscal i.e. before February 2007. This would mean an investment horizon of about 3 to 4
months if the negotiations fructified. Corus had already announced on September 25, 2006 that
it was in advanced talks with potential buyers, the markets had already factored in an increase in
share price. The shares on October 17 traded in vicinity of 480 pence. Since the current stock
price is higher than the bid price of Tata Steel, we cannot ex-ante expect a profitable trade from
an arbitrage position by going long Corus stock. But, the market predicts a bidding war between
Tata Steel and CSN of Brazil since CSN is one of the major shareholders of Corus Group Plc
and has already expressed an interest in submitting a counter bid. In case a bidding war takes
place, the stock price of Corus can be expected to appreciate substantially. Hence we can expect
to profit from the trade. The position to be assumed here is to go long Corus shares and wait for
the deal to consummate and get the cash from the acquirer.
described above is shown in Figure 15
200
150
100
50
‐150
Acc PnL
Target PnL
Gain
27/Feb/07
07/Feb/07
18/Jan/07
29/Dec/06
09/Dec/06
19/Nov/06
‐100
30/Oct/06
‐50
10/Oct/06
0
Loss
Figure 15: Profit/Loss Evolution on a Per Share Basis – Corus
Hence, as it turns out post-facto that the trade becomes significantly profitable. This occurred
because the bidding war did take place and the stock price of Corus kept going up post the deal
announcement as both Tata Steel and CSN increased their bids multiple times. The Corus share
closed at 607 pence on January 31, 2007, the day of final deal announcement and continued to
trade in this vicinity till the consummation of deal.
The arbitrageurs (assuming the above position) would have made a 67.03% return in a few
months’ time between deal announcement and consummation. This gap in case of Tata Corus
deal was October 17, 2006 to January 31, 2007 i.e. 241.3% annual.
Bibliography Business Line. ‘Tata Motors’ ‘A’ rights priced Rs 305 a share’. E-paper, Wednesday, Sep 03,
2008. http://www.thehindubusinessline.com/2008/09/03/stories/2008090352370200.htm
Business Line. ‘Promoters’ stake in Tata Motors rises to 42%’. E-paper, Saturday, Nov 01,
2008.
http://www.blonnet.com/2008/11/01/stories/2008110151670300.htm
Cornelli, Francesca and David D. Li ‘Risk Arbitrage in Takeovers.’ The Review of Financial
Studies, Vol. 15, no. 3, pp. 837-868, Summer, 2002.
Lauterbach, Beni and Paul Schultz. ‘Pricing Warrants: An empirical study of the BlackScholes Model and Its Alternatives.’ Journal of Finance, Volume 45, Issue 4 (Sept., 1990),
1181-1209
Loughran, Tim & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving
Money on the Table in IPOs?," Review of Financial Studies, Oxford University Press for
Society for Financial Studies, vol. 15(2), pages 413-444, March.
Mason, Scott P. and Sally E. Durdan. ‘Applications for Financial Futures.’ March 28, 1986.
http://cb.hbsp.harvard.edu/cb/web/product_detail.seam?R=286109-PDFENG&conversationId=309614&E=12784
Mitchell Mark and Todd Pulvino. ‘Characteristics of Risk and Return in Risk Arbitrage.’ The
Journal of Finance, Vol. 56, No. 6 (Dec., 2001), pp. 2135-2175
Data Sources Various Offer books
RBI Database on Indian Economy
Google finance
Reuters
Company filings summarized in offering prospectus
www.asic.gov.au

Doctor Prof IND ral student, In fessor, IIM C IAN INSTI W Specia

Transcription

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