Shoestring Arbitrage with Stock Buy-backs

The case analyses an opportunity of risk arbitrage associated with stock buy-backs (repurchases) available to retail shareholders in India. The opportunity arises from a differential treatment of small (retail) and large shareholders by Indian stock buy-back regulations. There has been strong anecdotal evidence of individuals taking advantage of this opportunity to make significant returns. The case illustrates the mechanics of the transaction, explores various sources of risks that differentiate it from a pure arbitrage play and the impact of these risks on the profitability of the transaction. The case also analyses the systemic checks that prevent arbitrageurs from making large abnormal profits using this opportunity. Finally, the case touches upon the motivation underlying this regulation and the regulatory considerations involved in remedying the risk arbitrage opportunity.