Mumbai-based real estate developer Akruti City is back in the headlines again for all the wrong reasons. Market regulator Sebi is going to probe an abnormal rise in price of the company’s shares over past two months. The company was a casualty of the market crash in January 2008 when private equity (PE) investors Citigroup and AIG backed out of an announced deal.
Akruti scrip shot up almost 4 times after hitting a 52 week low of Rs 550 in mid-January 2009 to touch Rs 2,364 on March 19. As a result it became second-largest realty firm after DLF in terms of market-cap overtaking Unitech.
The sharp rise of the stock had come as a surprise at a time when investors have become very cautious of realty stocks, given expectations of further price drops in the market and lower demand.
Even a rating downgrade didn’t make any difference to the upward movement of the stock. This week, rating agency Crisil had downgraded Akruti City Ltd to ‘DA3’ from ‘DA2’, reflecting stress in Akruti’s liquidity, and extended delays in its project completion. Akruti’s liquidity has been affected due to the slowdown in the sector as also due to its aggressive development strategy and higher focus on commercial projects, which require a greater proportion of upfront funding compared to residential projects (share of commercial projects in Akruti’s total saleable area in ongoing projects is 69%).
The liquidity issue is reflected in the delays in the payments of certain working capital loan instalments by the firm and reschedulement of a few of its bank loans.
Derivative Trading Ban:
Following the sharp movement of the scrip over the last one week, NSE said it will remove Akruti City from its derivatives segment by end of this month. Trading in Akruti’s futures and options will be halted after March 26, when the contracts for April and May expire.
Though NSE did not specify a reason for placing a ban on its F&O trading, according to rules, NSE has to put restrictions on trading in the derivatives segment of a counter once open interest in a stock crosses 95% of the market-wide position limit (MWPL), which depends on the floating stock of a company.
When open interest crosses this level, participants are allowed to trade only to unwind positions. New positions can be created only after open interest falls below 95% when the stock comes out of the ban period.
One of the reason why the norm could have got triggered is the shareholding structure of the firm. Akruti has very low floating stock and such firms are prone to manipulators pushing up the share prices.
Bull Run Ends
But it all came crashing down on Friday after news broke out of the NSE disallowing derivative trading of the stock as also Sebi investigation on the price movement. The scrip dropped 27.8% to close at Rs 1,607.5 on BSE.
Besides the promoters who hold almost 90% stake of the firm, other significant investors as of December 31, 2008 include DLF Retail Developers (1.2%), Citigroup Global Markets (1.05%) and Pacific Corporate Services (3.36%).