Is arbitrage due to corporate action good profit making opportunity?

One recent Example that I can take of is in the case of Escorts. Spot prices are more than 12-13% higher than April Futures. I looked if there is any opportunity to make some cool risk free profits and then stumbled upon this article but there is no clarity.

If at all , we want to make use of this opportunity how do we do it? As far as im aware we cant sell in Cash market ryt?

It would be great if someone can throw light on this topic

Arbitrage opportunities arise when prices of the same security deviate from each other in different markets. One such recent example is Escorts Ltd. There are various reasons for prices to diverge from each other, for Escorts this seems to be because of Kubota Corporation’s open offer to buy 28% shares of the company.

The price of Escorts in the equity segment currently trading at around Rs. 1825, while the futures contract is trading at Rs. 1590 for April expiry. A discount of Rs. 235.

One way to benefit from this difference is to buy 1 lot (550 shares) of futures contract and short sell a similar quantity in the equity segment and close the positions when the prices converge and pocket a profit of Rs. 235 per share, excluding taxes and charges. But in India, it is not as straightforward as one cannot hold a short position in the equity segment overnight. So the only way to do this is via the Securities Lending and Borrowing platform.

SLB is a medium for lending and borrowing securities allowing all market participants including retail investors to lend/borrow securities through an Authorized Intermediary (AI).

For a lender of shares, the platform provides an opportunity to earn incremental income on their long-term portfolio. While for the borrower of shares, it provides an opportunity to exploit opportunities like arbitrage and profit from it.

The contracts traded on the SBL platform can vary between immediate expiry (1 month) up to 12 months. Usually, the maximum liquidity for borrowing and lending will be for 1 month. You can learn more about the basics of SLB here.

So if we’re to exploit the arbitrage opportunity in Escorts, you can borrow 550 shares by paying a fee of Rs. 225 per share. Plus you’ll have to maintain a margin of 125% of the value of the stock in your account before borrowing. Once you borrow the stock you can sell it in the market, essentially blocking 25%.

Quote for SLB trade from NSE website.

Trade Calculation

Quantity Price Total Amount Margin Requirement RoI
Buy Futures 550 -1590 -874500 238000
Borrowing on SLB 550 -225 -123750 1254690
Sell Shares 550 1825 1003750 -1003750
Gross Profit 5500 488940 1.12%
STT and other charges 1108.46
Net P&L 4391.54

So what looked like an easy profit of Rs. 235 per share or comes down to mere Rs. 10 per share. And will come down even further considering charges.