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Case Study

SHOESTRING ARBITRAGE WITH STOCK BUY-BACKS

Anshuman V. Ravi , Mohanan Srijith
Arbitrage (1364) Risk arbitrage,.Stock repurchases, Capital markets regulation (1242),. Limits to arbitrage (10829) , Indian regulations

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Abstract 

The case analyses an opportunity of risk arbitrage associated with stock buy-backs (repurchases) available to retail shareholders in India.

The opportunity arises from a differential treatment of small (retail) and large shareholders by Indian stock buy-back regulations. There has been strong anecdotal evidence of individuals taking advantage of this opportunity to make significant returns.

The case illustrates the mechanics of the transaction, explores various sources of risks that differentiate it from a pure arbitrage play and the impact of these risks on the profitability of the transaction. The case also analyses the systemic checks that prevent arbitrageurs from making large abnormal profits using this opportunity. Finally, the case touches upon the motivation underlying this regulation and the regulatory considerations involved in remedying the risk arbitrage opportunity.

Learning Objective (Maximum of 500 Characters):  Briefly describes teaching goals of case.

The case is designed to enable students understand the idea of risk arbitrage in a real-life setting. It helps them develop a structured approach towards the analysis of the risks associated with arbitrage strategies and the identification of strategies to mitigate the impact of these risks while executing the arbitrage trade. The case also provides insights into regulatory motives for differential treatment of various shareholders and to understand the unintended consequences of well-meaning regulation.

  • Pub Date:
    22 Mar 2019
  • Source:
    IIM-B
  • Discipline:
    Financial Management
  • Product#:
    1339
  • Keywords:
    Arbitrage (1364) Risk arbitrage,.Stock repurchases, Capital markets regulation (1242),. Limits to arbitrage (10829) , Indian regulations
  • Length:
    Pdf : 11 page(s) ,

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