Karur Vysya Bank partly-paid shares

Here is an arbitrage opportunity for shareholders of Karur Vysya Bank. This option will be best-suited for those shareholders who wish to continue holding the shares or those who are interested in investing in Karur Vysya Bank shares (can be purchased at a discount if this method is followed.) 

KVB came out with a rights issue recently with the following terms: 

Amount Payable per equity share	Face Value	Premium	Total
On Application	6	69	75
First call	2	38	40
Second and final call	2	33	35
Total	10	140	150

As of now, only the application money (FV: 6) has been paid for the partly-paid up shares traded in the market.

Following is the share prices of various series of Karur Vysya Bank:

Symbol                    Series        Price (April 13, 2011 close price)

KARURVYSYA        EQ             422.15

KARURVYSYA        E4              329.35

Here, the first item represents fully-paid up shares & the second item represents Equity Shares of Rs. 10/-each (Rs. 6/- paid up) on which the first application money of INR 75.00 per share has already been paid. Subsequent amount of INR 75.00 per share is yet to be paid. So, buying the partly-paid up  at 329.35 is equivalent to buying the fully-paid up share @422.15 per share.  Effectively, the cost of  share will be 329.35(to be paid at the time of purchase of partly-paid share) + 75.00 (call money; to be paid later in 1 or 2 installments.) = 404.35
Effectively, the cost of 1 share will come down by 17 rupees approximately.
This provides for a margin of safety on the investment with the added benefit of deferring the cost of acquisition over a period of time.

Some points to be considered:

• The partly-paid up shares are trading with low volumes. So, this strategy is best suited for investors(present and prospective) of Karur Vysya Bank only.

• Dividend entitlements, if any, will be proportionate to the paid-up value of the equity share. i.e., If a dividend of INR 10.00 per share is declared now, only 6.00 per share will be paid for the partly-paid shares.

• Brokerages have not been considered in arriving at the figures, as this varies from broker to broker.