Days before the Shalimar Paints Ltd-Hella Infra Market Ltd share-swap was announced, Shalimar's stock jumped 20% on a seemingly normal trading day on 3 August. Trading volumes were unusually high on that day and the next.
The trades might lead to regulatory scrutiny as the paint company seeks shareholder approval for the deal with the building materials platform, announced on 12 August, two people told Mint.
Shalimar shares opened at ₹67.68 apiece on 3 August and closed with a 20% gain at ₹80.01. The traded value reached ₹34.74 crore, with 4.52 million shares changing hands during the session. On 4 August, the share price added 3.16%, although volumes surged to 10 million.
“There might be some regulatory back-and-forth because of this one trading day,” one person directly aware of the matter told Mint, referring to the 3 August trades. “Shalimar is largely an illiquid stock. Such high volumes and stock spike days before a deal is announced might attract some scrutiny.”
The 3 August volumes were over five times more than the stock's 15-day simple moving average volume of 839,068 shares as of that date, and more than eight times higher than the previous trading day's 15-day simple moving average volume of 541,398 shares.
This volume exceeded the company's one-year average daily volume of about 164,000 shares by almost 28 times, according to data compiled from Bloomberg. This unusually high volume for the stock seems to have set off some alarm bells, with even the National Stock Exchange of India issuing a query to Shalimar the same day.
“Significant increase in volume has been observed in Shalimar Paints Ltd. The Exchange, in order to ensure that investors have the latest relevant information about the company and to inform the marketplace so that the interest of the investors is safeguarded, has written to the company,” the NSE said.
Company statements
The paint company informed the stock exchanges at about 11 PM on 3 August that it had received a no-objection certificate to reclassify certain entities from the promoter/promoter group category to the public category. In its initial written reply to the NSE the next day, Shalimar said it was not aware of any material price-sensitive information requiring disclosure.
“As of now, there is no pending information/announcement which in our opinion may have a bearing on the price/volume behavior in the scrip,” the company said.
Two days later, the company countered its own reply, without a fresh query from the exchange. In the new disclosure, the company said it “is evaluating various strategic options with a view to improve the company's operational and financial position and enhance shareholder value.”
These options, the company added, included restructuring of business operations, acquisition or transfer of assets, fund raising and/or any other corporate actions. The new disclosure acknowledged that this information could potentially constitute unpublished price-sensitive information, but that Shalimar had “exercised due care to ensure that such information has not been disclosed to any third party.”
Shalimar added that the company, its promoters including Hella Infra Market and key managerial personnel had no knowledge of the reasons for the spike in Shalimar shares.
On 12 August, Shalimar's board approved a ₹10,440 crore share-swap deal that would give Hella Infra Market shareholders collectively more than 77% of Shalimar Paints, while also offering an alternative to the building materials platform's planned ₹5,000 crore initial public offering.
Shalimar Paints, Hella Infra Market and the Securities and Exchange Board of India did not respond to queries emailed to them on 17 August.
Likely scrutiny
Lawyers told Mint that while a potential leak does not automatically invalidate the proposed share-swap, it is likely to invite scrutiny.
“Sebi would likely examine the timeline very closely,” said Soumya Singh, co-founding partner at law and policy firm Thistle & Law. “A suo motu clarification (from Shalimar) helps, because it shows corrective disclosure, but it does not automatically shield the board from LODR (listing obligations and disclosure requirements) or PIT (prohibition of insider trading) exposure.”
At the same time, the stock exchanges may seek further information on the chronology, valuation, swap ratio, proposed issue, related-party status, pricing compliance and the company’s assessment of undisclosed price-sensitive information, explained Alay Razvi, managing partner at law firm Accord Juris.
“They may defer in-principle approval or require supplementary disclosures,” Razvi added.
The Shalimar board will convene an extraordinary general meeting to seek the requisite 75% shareholder approval for the share-swap deal, the date of which has not been disclosed yet.