Monday, December 31, 2012

A brush with (Brain) death

This post talks about the role of “shit happens” in special situations

A bit late to write the post but none the less the learning for us has been mammoth.  Fundoo Prof. talks about the concept of “Brain Dead” investors and their important role and contribution in enhancing our returns in special situations. An example for the uninitiated – people who do not tender their shares in open offers making the acceptance ratio favourable for those who tender.(more about it from here )

The Murugappa group had launched an open offer after the acquisition of Shanthi Gears. We had been accumulating the stock with a view to eventually tender them in the open offer.

As a conservative shareholder, I double-checked the details filled up in the Demat Account instruction slip. Like a good boy submitted the same one day prior to the last day for closure of the offer, got the acknowledgement from the bankers on a photocopy of the DP slip.

Life’s Unexpected Turns !!

Around 2.00 pm on the last day of the offer, I get a call from my depositary participant (DP) stating that there is a problem and most probably my request for tendering the shares will be rejected. Half way through with my lunch, I gather all the relevant documents and run to the office of the DP (4kms from my place) trying to decipher what has gone wrong. The tendering process is officially closing at 4.00 pm. The DP tells me that the request for the “off-market transfer”, for the transfer of shares from my account to the escrow account opened by the Registrar of the company, has not been executed by NSDL (the clearing house). Generally off-market transfers happen online, at a click of a button, so logically my request should have been cleared early morning itself. After discussing the problem with my DP I get to know that typically off-market transfers have to be either accepted or rejected by NSDL.  The rejection was important since then I could have re-submitted my request.

They were kind enough to give me printouts of the said transactions, which stated that the reason for rejection on the NSDL clearing platform as-“Awaiting confirmation from counterparty”.  A brief chat with my DP indicates that they can’t help me sort this problem, the only solution was to check with the Registrar to the Issue who was the receiving party for this share transfer.

I now rush to the office of the Registrar – Karvy (around 5kms from my DP’s office) around 2.45 pm with all the documents to figure out as to why the request was not accepted.  At Karvy’s office the staff tells me there is no problem at their end and this being the last day for accepting forms I should not disturb them. After patiently trying to explain to them the issue I had, I was told that they had robust systems, being the largest Registrar in the country handling such offers and I shouldn't doubt their competencies. I had no luck explaining to the local staff but was fortunate to get the number of the concerned person at their head office in Hyderabad.

Now the problem gets a bit more interesting, atleast there is somebody willing to take the blame. At Karvy Hyderabad, the officer in charge of Shanthi Gears offer tells me that there was a technical glitch in the server early morning for a couple of minutes and being the last day, there have been a few hundred odd entries which were not accepted by the said escrow account of Karvy (Shanthi Gears had ~ 19000 investors as of September 2012!!). With some clarity of the exact problem, I seek their input in resolving the said issue. Karvy tells me to check with my DP and instruct them to re-fresh / resend the instructions. It is already 4.00 pm by then and I rush back to my DP’s office.

Ab isko dawa nahi, dua ki zaroorat hai..(Prayer is the only hope)

All my efforts to convince my DP for putting in a fresh transfer instruction are in vain, given that the system is already showing a zero balance in my account against Shanthi Gears. So the sum and substance of the story so far –
·    My shares are out from account and hence zero balance
·    DP can’t do anything about it since its out from his server as well but stuck at NSDL end
·   NSDL says they can’t do anything since system is showing awaiting third party confirmation and the system protocol is to reject such “stuck trades” only at end of day around 8:00 pm
·    Karvy, the Registrar, obviously have not got the shares stuck at NSDL server.

After a round of discussions with the head office of my DP, Karvy and NSDL the only solution that finally emerges around 5:30 pm is to go to the temple on the way home and pray for the best !!! I am well on my way to being declared “Brain Dead” by using Prof’s definition.

Like a typical Hindi movie, the ending is however happy after all the drama. I get an SMS from NSDL saying that my requests have been cleared around 07:30 pm and I breathe a sigh of relief!

Murphy and Taleb

Remember Murphy’s law? It says something like “Anything that can go wrong, will go wrong”. On careful reading it seems to restrict judgement only to risks which are largely known. Nassem Taleb’s theory of Black Swans however talks about risks which are largely unpredictable.

Earlier, while evaluating open offers/special situations our standard thought process stopped at the routine. Calculate the acceptance ratio, gross and net spread , time risk to the offer, opportunity cost of the trade, expected price of the share after the offer etc. etc… Honing these skills over a period may help reduce the risks as pointed out by Murphy. But what about Taleb. Issues like signature mismatches, wrongly filled application forms etc come to mind. Similarly, those executing trades on online platforms need to be aware of differing settlement cycles if they want to buy/sell on the cum/ex record date. But what about technical glitches like the one discussed above and other risks that we are simply not aware of??

We now we realize that even if we gain confidence over a period in judging some of the controllable  factors, there could always be surprises, some of which will be totally and definitely out of our control. As and when you fall into one of these pits, the end result would be the same. Being branded a Brain Dead investor. And there would be no point in saying “It was not my fault”.

So where does one go from here?
  • Murphy is probably right but Naseem Taleb is surely right - It is extremely important to incorporate some probability for remote SHIT happening events in all investment operations.
  • An eye for operational detail is as important as an eye for analytical detail
  • One possible solution could be checklists. In case of open offers/similar tenders, play safe and submit all the documents atleast 3-4 days before the closure of the offer. If things go wrong there would be time to correct it.
  • Even if things look to be a sure shot deal position sizing should be done incorporating the risks of the unknown. For us, leverage is strictly avoidable

Best of manufactured luck!!!


  1. Thanks Abhinav and Niren. Till now I was investing only in long term opportunities, but recently I have ventured into special situations. I will add this point " In case of open offers/similar tenders, play safe and submit all the documents atleast 3-4 days before the closure of the offer. If things go wrong there would be time to correct it" to my checklist for sure. Thanks again

    1. Thanx Anil , glad to know you appreciate the point.

  2. Hi,

    Its nice you shared your experience which will help us to be more precautions in future. but let us discuss the problem from a different view point.

    a) When you are transferring the shares from your DP to Counter DP, Registrar does not come into play at all, it is a transfer from a depository to another Depository. The Role of Registrar will come only after you tender the shares. People wait till last moment to tender the shares and it is quite obvious that there may be issues of confirmations. I am sure NSDL system is robust

    Also I can share from my experience, That In case of many offers, the Lead Managers accept the application forms and puts in entry till late evenings.

    b) I don't agree with you to submit the offers few days earlier. Once you submit the offer, your option will expire to sell it in market or not to tender the shares(We need to go for optimal Exercise). In Special Situation we need to look at that event in totality, You want to tender the shares a X price, Which may become market price on last day ? You may want to surrender the shares and there is a counter offer or even worse there is high probability of De-listing offer going unsuccessful?

    c) Such technological impediments are unavoidable and probability of that happening is very small. Also NSDL , CDSL and Exchanges co - operate to make sure that Minority Investors interest are fully taken care of.

    If you try to decrease such unexpected errors, You increase risk of getting a better or Optimal price.


    Jigam Gandhi

    1. Thanx Jigam for your detailed response.
      a. You would appreciate that in case of Shanthi Gears - Karvy was acting as both the Registrar and the Depositary Participant (different corporate entities).Also in all the cases, you can tender the forms either with the registrars or the lead managers to the issues. We agree with you that Lead managers go out of their way to accept application forms till late in the day for offers, but issues like signature mis-matches, wrong entry in the system by the Registrar / Lead Managers, technical glitches can hit you from nowhere. We hope/wish/pray that your track record of flawless execution of such offers/delistings continues for a long time in the future as well.
      b. Preserving optionality is something very important to us and we have given our thoughts about the same in our post on delistings. We would agree with you on it being one of the most important aspects in special situations but the point we were trying to highlight was the Taleb risk of shit hitting you from nowhere.
      c. Small probability events having large impacts are very important risks to focus in our view. Gautam's comment on the same makes it very clear.
      While consciously trying to reduce errors is one aspect of the post we also want to talk about the sheer existence of such events which was a first time experience for us atleast.

  3. Your post remind me of a quote "Condoms aren’t completely safe. My friend was wearing one and he got hit by a bus."

    1. Gud one Gautam,
      I remember Prof. talking about this one in the classroom and the reaction that followed..

  4. Hi Abhinav and Niren,

    Thanks for sharing your experience. I completely agree with you that it's important to be on the safe side and tender the shares in time to rectify any unknown problem which might surface later.

    I don't know which DP you are dealing with but my experience has been that online trading platforms (like Edelweiss, India Bulls etc) who have their own DPs are poor at executing off market transactions which is required for tendering shares in open offers, tender buybacks etc. Their people usually don't get these kind of requests and have little experience in executing the same. At least that has been my experience.

    Sole DPs like banks (Axis Bank, HDFC bank, ILFS etc) are more efficient and are more experienced with these kind of requests. That's the reason I opened another DP account with a bank and my experience with tendering of shares has been fine with them.



    1. Hi Ankur,
      Thanx for sharing your experience as well.
      Would tend to agree with your classification of DPs for off-market trades.