Table of content:
- What is partly paid share?
- Premium Calculation on partly paid share
- Reliance Partly paid vs Reliance Fully paid
- Is Arbitrage possible in this scenario?
- How to get maximum return using partly paid?
What is Partly paid share?
Indian Stock Market have seen listing of partly paid shares of the big Indian companies like Reliance, Tata Steel, etc. Partly paid means the purchaser has only paid part of the total issue price of the share when purchasing it, with the understanding that as the company requires more funds, calls will be made from time to time until the shares are fully paid, when no further calls can be made.
Reliance EP(which is partly paid Reliance share) listed on 15th June at Rs. 690 is currently trading at Rs. 1,210 up 75% from listing price while Reliance fully paid share up 28% only during same period.
Tally of Price:
Reliance Partly paid vs Reliance Fully paid
Now let’s understand how the Partly paid shareholders is earning more.
There are two method by which partly paid up can earn more than a fully paid up:
Method 1: Buying Partly paid up instead of buying Fully Paid up:
There are further two bifurcation –
1. Reliance Shareholder who received Right shares –
Let’s take an example that share price of the fully paid share is Rs. 100. Now the company issue its right share at Rs. 90 to current shareholder at condition of Rs. 20 On issue and Rs. 20 on first call and Rs. 50 in 1.5 years. Now let’s say till the time listing date came, there is increase in price of the fully paid share up to Rs. 110. Then due to increase in price of the fully paid share, Partly paid share issue at the price around Rs.40 due to increase in price of the share by Rs. 20. Hence, investor of partly paid earned 100% ( Rs. earned on Rs 20) in partly paid where fully paid just gave 10% (Rs 10 earned on Rs 100) in that period.
If we talk about the Reliance shareholder at the time when right issue announced, The price to be paid for the Right Share is only at Rs. 314.25 where the closing price on listing date of the same is at Rs. 698 which is 122% on the same date and till now it has already given 2.85x return.
2. Shareholders who bought partly paid after listing –
Now understand with current Eg. for those who do not have right share of Reliance. Current Market Price of Reliance Rs. 2000 and Reliance EP are at Rs. 1000. Now if you have Rs.10,000 in your Bank Account, If you buy fully paid RIL Share you can purchase only 5 shares at this price and let’s say in a month if it reaches to Rs. 2100 then you will earn (2100 – 2000) *5 = Rs. 500 Where if You buy RIL EP with Rs. 10,000 you can buy 10 EP at this level and if fully paid share rose to 2100, It will also touch almost 1090 – 1100 Then in that case you will get ( 1100 – 1000 )*10 = Rs. 1000.
In Total even if You do not have the Right at the time of issue still you get more return (Approx. 40-50%) on your same capital, which depends on the price of fully paid share.
Here is example of 3rd March-21 where partly paid earn more return than fully paid up.
One more thing you need to understand that now as soon as we come closer to the next calls, the price difference will be coincides with each other as there is approx Rs. 50 premium available in the partly paid as compared to fully paid Reliance share due to time value of money.
Method 2 Is Arbitrage possible in this scenario?
Second, Using arbitrage opportunity between both the partly and fully paid share
There are 2 calls remaining first on May 21 at Rs. 314.25 and another one on Nov 21 of Rs. 628.50. The price of partly paid up became same when company ask for last call. Then the difference will be zero as they all have there fully paid share of reliance but the premium will gradually came down so this creates an arbitrage opportunity.
Let’s understand the arbitrage: As per Investopedia, Arbitrage is the simultaneous buy and sale of the same asset in different markets to profit from tiny differences in the asset’s listed price. It exploits short-lived variations in the price of same or similar financial instruments in different markets or in different forms.
In context of Reliance & its Partly Paid shares: If you sell Partly Paid Shares and buy fully paid share at the same time Then on conversion of Partly paid share to fully paid share You will get the return of Rs. 50 on each type of transaction (Both Buy and Sell of Shares). So it gives return of just 0.025% (50/2000×100) on capital of Rs. 2,000. We also need to pay transaction charges and brokerage, so this is not profitable in that scenario.
How to get maximum return using Partly paid shares?
So to get more return and if you have belief that Reliance share price will go up in upcoming future You should buy Reliance EP instead of Reliance fully paid share i.e. using Method one.