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Britannia’s Bonus Debenture Yield Tumbled On Erroneous Trade

Why the yield on Britannia’s bonus debentures tumbled on Friday.

A chart showing the ‘flash crash’ change in the value of the U.K. pound versus the U.S. dollar overnight sits on a trader’s computer screen. (Photographer: Chris Ratcliffe/Bloomberg)
A chart showing the ‘flash crash’ change in the value of the U.K. pound versus the U.S. dollar overnight sits on a trader’s computer screen. (Photographer: Chris Ratcliffe/Bloomberg)

An erroneous trade led to a settlement default and a spike in the prices of bonus debentures issued by Britannia Industries Ltd., causing the yield to tumble on Friday.

Britannia had issued 24.03 crore bonus debentures in August—over half of which were distributed to the promoters and rest to the public proportionate to their shareholdings. Investors received one debenture of face value of Rs 30 and a coupon rate of 8 percent for one share held. The tenure was 36 months from the date of allotment—till Aug. 28, 2022.

On Oct. 9, the day of listing, 2.64 crore debentures traded at a weighted average price of Rs 30.72 and closed at Rs 30.81, according to NSE data. In all, debentures worth Rs 81.16 crore changed hands on debut in 1,933 trades.

But on the day of settlement—in this case T+1—nearly 1.5 crore debentures ended in default as the investor who placed the order couldn’t deliver securities. That’s because the investor had erroneously placed the order for 1.5 crore securities instead of debentures worth Rs 1.5 crore, a trader at a domestic brokerage told BloombergQuint on the condition of anonymity. He cited the error to lack of understanding about debenture trading.

Debentures are normally represented in value terms—say if an investor has 100 debentures of Rs 30 face value each, the depository shows them as 3000, unlike in equity where it shows the number of shares. The investor seems to have mistaken the value as shares and punched it on the trading platform, the person cited earlier said.

What puts the error in perspective is that besides the company’s promoters, only LIC India Child Fortune Plus Growth Fund owns such a large number of Britannia debentures. It received 1.42 crore securities in proportion to its 5.94 percent stake in Britannia. Other shareholders owning more than 1 percent stake in the company include Arisaig India Fund, SBI Arbitrage Opportunities Fund and ICICI Prudential Regular Savings Fund.

The Economic Times first reported on the freak trade.

Clearing and settlement rules mandate auction of securities if an investor fails to deliver. In this case, nearly 1.5 crore debentures of the maker of Good Day and Tiger biscuits were put up for auction on the National Stock Exchange’s trading platform NEAT on Oct. 11. But the platform received demand for around 79 lakh debentures.

The auction caused the debenture prices to spike up to Rs 37.02—more than a 20 percent premium to Wednesday’s close.

The total traded value stood at Rs 13.95 crore at a weighted average price of Rs 31.43 on the NSE where the debenture closed at Rs 35.5 apiece. On the S&P BSE Sensex, it ended at Rs 36, with 7.10 crore debentures worth Rs 218.8 crore traded.

The shortage of demand in the auction created a shortfall of Rs 29.23 crore for the clearing member. According to exchange regulations, any shortfall in the amount must be made good by the clearing member.

Moreover, higher prices also caused the yield on the debentures to fall to as low as 6.5 percent against a coupon rate of 8 percent, according to BloombergQuint’s calculations.