IPCL-RIL merger offers arbitrage opportunity

Investors Lap Up Lower-Priced IPCL Stock
To Get Reliance Shares At A Cheaper Cost

Sep 07, 2007

Ashish Rukhaiyar
MUMBAI

WITH the decks cleared for the merger of IPCL with Reliance Industries (RIL), market participants are rushing to take advantage of the arbitrage window. While both scrips have been on the rise recently, brokers do not rule out a gain of 2-3% in the short term if this arbitrage window is used effectively.

With the Gujarat and Bombay High Courts approving the merger, a record date for the share swap will be announced shortly. As per the swap ratio, a holder of five IPCL shares will be entitled to one RIL share.

Quite a few investors, who are holding RIL shares, are said to be cashing out and buying IPCL shares instead. And some of the savvy investors looking for a fresh exposure to RIL, are taking the IPCL route. This is because, at current market price, the total cost of five IPCL shares is less than that of one RIL share. Hence, when RIL shares are allotted, the investors will get them at a lower price or in other words, a higher number of RIL shares.

On Thursday, IPCL scrip gained 0.62% to close at Rs 388.10, while RIL closed at Rs 1,983.30, up 1.32%. So, an investor buying 500 IPCL shares would have to shell out Rs 1.94 lakh, which, in effect, becomes the buying price for 100 shares of RIL. To buy 100 RIL shares directly from the market would cost an investor around Rs 1.98 lakh.

“If you are bullish on Reliance, then buy IPCL,” said KRIS director Arun Kejriwal. “This is a much cheaper way of buying Reliance as you are still making around 2-3% profit. Investors who want to lockin the profits without any risk can look at it,” he added.

Although at current levels, the gains are marginal, it does present an opportunity to make some amount of profit. Real gains could be a little over 2%, as one would have to factor in expenses like brokerage, securities transaction tax, stamp duty and service tax.

Another strategy for investors could be to trade in the derivatives segment by buying one lot of IPCL futures and selling one lot of RIL futures. While market participants are unanimous in pointing out this arbitrage opportunity, many funds are already availing this option.

"The arbitrage trading has been going on for quite some time now and so the quantum of real gains has narrowed down,” said a dealer who tracks institutional trades. The volumes in both the counters have witnessed a rise in the recent past as almost all the leading funds are trying to cash in, before the arbitrage window shuts, he added.

Incidentally, in the past two trading sessions, around 7-9 lakh IPCL shares have changed hands on each day. This is much higher than the two-week average of 3.10 lakh shares.