Everest Insurance hits circuit break for 4 consecutive days after book closure for 300% right; Returns of EIC holder as high as 45%

Thu, Apr 25, 2019 2:26 PM on Exclusive, Stock Market, Latest,

Everest Insurance Company (EIC) has hit positive circuit breaker for the fourth consecutive day today. In accordance to the directive issued by Beema Samiti to raise the paid-up capital to a minimum of Rs 1 arba, EIC had declared two consecutive right issues. First, it issued 105% rights to promoter shareholders only, which has been fully subscribed and listed in NEPSE. After that, it had declared 300% right shares for both ordinary and promoter shareholders. The 300% right got approval from SEBON and the book closure date was fixed at April 22, 2019.

As per the unaudited second quarter report of EIC for FY 2075/76, it's paid-up capital stands at Rs 13.36 crore with 13.36 lakhs ordinary share floating in the market. Then on November 13, 2018 the book closure of 105% promoter right shares was announced. So, after the listing of 105% right gets listed the supply if EIC scrip in market has increased by 14.03 lakh units, reaching a total of 27.39 lakh units. However, the catch is since it is promoter share, it isn't clear yet upon listing if it will be freely tradable as ordinary shares or lock-in period will be imposed.

There have been speculation that, same as NABILP and NIBPO, EICPO would also be traded freely in NEPSE although at a slightly different price, no confirmed actions have happened yet. In the meantime we also have to consider the fact that prior to this right issue, EIC didn't have promoter shareholding and the 105% right was issued to establish promoter base in the company. Nonetheless, the bottom line is – the supply of EIC scrip is still just 13 lakh units.

On April 21, 2019 the Last Trading Price (LTP) of EIC was Rs 990. So, on April 22, 2019 after the adjustment of 300% right, the market opened at Rs 328, hit a positive circuit with rise by 9.767% and closed at Rs 354. From then till today, it has been hitting positive circuit continuously for four days. A question in my mind, what is that about?

Once again the invisible hand of demand and supply has done its job. The adjustment of 300% right shares has pushed the demand while the supply is constant at 13 lakh units only. So when such mismatch occurs, the price rises to attain the equilibrium.

In addition to that, such rise is causing further increase in prices as it is pushing the possibility of higher rise in the networth of the individual holding the shares of EIC. For example, let's consider that I have 10 units of EIC. So, one day before book closure i.e on April 21, 2019 my net worth is Rs 9,900 (10 units*Rs 990 per share).

Since I have shares while book closure, I am eligible to apply for 300% right shares. So to apply for right I'll have to invest Rs 3000 (30 units*Rs 100 per share). Since the price has risen substantially from the day of adjustment, and considering that the price remains at Rs 469, my net worth will be Rs 18,760 (40 units* Rs 469 per share). Rs 469 is the LTP of EIC on April 25, 2019 and it may change in future but for we'll consider that it will remain at Rs 469 for simplicity of calculation.

Thus, our total investment is Rs 12,900 (9,900+3000), while the networth post right will be Rs 18,760 indicating a rise in net worth by Rs 5,860 i.e 45%. Given such charm, the demand of EIC is being pushed further higher and raising its prices. However, one must be cautious of the uncertainty of future. If the prices rises further beyond Rs 469, the return will increase above 45% but to the contrary if the prices fall, such return can't be guaranteed.