Orchid Chem gets a dose of subprime blow

Written by Markets Bureau | Mumbai, Chennai, Mar 18 | Updated: Mar 19 2008, 05:17am hrs
The plan of the promoters of Orchid Chemicals to hike their stakes in the company has gone haywire with US financial crisis showing its tentacles in India too. US financial giant Bear Stearns fall has, perhaps, hit Orchid Chemicals and Pharmaceuticals Ltd. Bear Sterns decision to sell its stakes in Orchid Chemicals has foiled the attempts of the promoters to jack up their stakes in the company.

The stock price of Orchid Chemicals dropped 44% since Mondays opening price following Bear Stearns decision to sell its stakes in the company. However, the stock price fall is not only due to the stake sale by Bear Stearns. Orchid Chemicals stock price dipped after the sell-off by Bear Stearns led to a margin call by two broking firms Indiabulls and Religare. The two broking firms had provided margin funding to help promoters to raise their stakes in the company in April to June.

A spokesperson of Orchid Chemicals, when contacted by FE said that the foreign investor had sold approximately one million shares, which went to the open market and were subsequently picked up by other FIIs. The subsequent selling pressure has led to the stock price crash.

However, the company reaffirm its strong fundamentals and robust growth plans which are right on track. This in no way will have any material impact on the companys fundamentals, he added.

Orchid Chemicals promoters raised their holding in the company to 24% from 17% through an 80:20 margin funding provided by Indiabulls and Religare. It means that the promoters borrowed Rs 80 for every Rs 20 they invested in buying the shares. The onus of price risk resided entirely with the promoters.

As the stock prices fell, the promoters had to repay Indiabulls and Religare to restore the investor-promoter investment ratio to 80:20. To meet these requirements, the promoters had to sell the entire 7% stake they had earlier purchased. Presently, the promoters do not have any further margin funding for their stake that stands at 17%.

Orchid Chemicals stock was down by 10.76% at Rs 113.60 on the National Stock Exchange (NSE) at the close of trading on Tuesday. The selling by the promoters has led to the weakening of the sentiments of the investors as they fear that Orchid Chemicals is likely to lose more of its earnings as it has entered into a complex foreign exchange options to hedge the currency risk. Extreme volatility in currencies like Swiss Franc and Japanese Yen has led to losses on options that companies have written in these currencies.

It may be noted that Bear Sterns sold shares in more than 25 companies to rival securities firms before JP Morgan Chase & Co and Federal Reserve have come to its rescue.