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The swap ratio approved for the Indiabulls Housing Finance-Lakshmi Vilas Bank (LVB) merger by their respective boards has opened an arbitrage opportunity, which could be exploited by traders for up to 20 per cent returns over a month or two if the RBI approves the deal, brokers said.
According to the swap ratio, LVB shareholders will receive 14 shares of Indiabulls Housing for 100 shares they hold in the bank, subject to regulatory approval.
100 shares of LVB at Wednesday's close were worth Rs 8,850, while 14 shares of Indiabulls were worth Rs 11,546.
This implies a 30.5 per cent discount that LVB trades at to the HFC.
If the RBI sanctions the merger, which these brokers expect it would, the LVB stock would have to outperform that of the HFC to close this 30.5 per cent gap.
This implies that a trader who buys LVB in cash — it’s not traded in the FO — in a certain proportion and sells one lot (500 shares) of the HFC futures contract will make a neat 21 per cent by April or May end.
The contract could be the April or May expiry one for which the client’s FO segment has to be activated.
Based on Wed closing prices, 500 shares of Apr futures for Ibulls is Rs 4.15 lakh.
On this, the applicable margin is around Rs 1.5 lakh.
In keeping with the swap ratio, you would have to buy approximately 3,570 shares of LVB in cash worth Rs 3.16 lakh.
The potential gain is Rs 99,000 (4.15-3.16) on an investment of Rs 4.7 lakh or a gross return of 21 per cent in one or two months, if all goes according to the plan, said Rajesh Palviya, derivatives head, Axis Securities.
However, clients should also reckon the risk of settling mark-to-market positions if the Ibulls HFC futures rises instead of falling till the arbitrage ends.
“Only informed traders with eyes fully open should enter this trade, which will pan out if RBI blesses the merger,” said Chandan Taparia, derivatives analyst, Motilal Oswal Financial Services.
