RPL’s derivative stock has to unwind for trade

RPL’s derivative stock has to unwind for trade

Mumbai: The stock price of Reliance Petroleum Ltd (RPL) in the derivatives market has to dip below Rs200 or above Rs240 to help unwind large amount of derivative contracts and push it to below 80% of its marketwide position or shares available for public trade, say analysts.

This would help the stock come out of the ban imposed by the National Stock Exchange (NSE). Most retail investors had purchased these contracts at higher prices.

“Huge unwinding could be triggered only if those prices are achieved or if the stock falls below Rs200, which would trigger margin calls," said Siddharth Bhamre, the derivatives specialist at Mumbai’s Angel Broking Ltd. At Thursday’s close, the November contract of RPL was priced a little above Rs221.

The futures and options (F&O) contracts of RPL had crossed 95% of the marketwide position because of the huge build-up in past sessions, leading to a ban on the counter at NSE on Wednesday’s trade.

“It is unlikely that a stock in derivative market remains under ban for more than three-four trading sessions," Bhamre said. “NSE will lift the ban if derivatives contracts on the stock goes below 80% of its marketwide position."

RPL is the first of the 50 Nifty stocks to face such a ban.

“Nifty constituents, which have large, free-float or non-promoter holding in terms of number of shares, do not usually see derivatives contracts go over 95% of their market-wide position," Bhamre added. “However, RPL was on a dream run in the past one month. This attracted a lot of retail investors."

On the other hand, stocks such as SRF Ltd, Arvind Mills Ltd and Essar Oil Ltd, which were also banned from derivative trade, have low free-float that makes them vulnerable,

Since 5 October, the Mukesh Ambani-controlled RPL saw Rs22,000 crore worth of erosion from its market capitalization in just three trading sessions. RPL’s stock price lost about 18% since Monday.

The stock began to slide after foreign brokerages such as CLSA and Morgan Stanley asked investors to cut exposure to the scrip.

RPL was riding on the basis of a speculation that Chevron Corp., the US oil major, which owns 5% of RPL, could soon exercise its option to buy additional stake.

“RPL’s rally was purely led by speculation," said Rajiv Varma, a derivative specialist at India Infoline Securities Pvt. Ltd, an arm of listed entity India Infoline Ltd. “It hit an all-time high of Rs295 on 1 November. Since then, many retail investors stepped into the counter. Now that the stock is trading at about Rs220, these investors will not unwind their positions unless the stock price goes to a range where they can sell out with minor losses. However, there is not much upside left for the stock at this point."