Why Apollo Hospitals shares tanked 29% in one week

Apollo Hospitals shares have fallen almost 29 percent in last one week. That’s wiping away Rs 2,686 crore of market cap in a few days. Immediately after the markets closed, clarification came from the company.

This is what happened:

Apollo Hospitals has allotted 3,089,242 equity shares of Rs 5 each to Dr Prathap C Reddy, one of the promoters of the Company, at a price of Rs 385.88 per share on 10 December, 2011. The price Rs 385 comes from the allotment price of the stock on 12 June, 2010 when warrants were allotted to Reddy.

[caption id=“attachment_157319” align=“alignleft” width=“380” caption=“Apollo Hospitals has allotted 3,089,242 equity shares of Rs 5 each to Dr Prathap C Reddy. Reuters”]  [/caption]

In case of a warrant the person has to pay 25 percent of the money upfront and has a window of 18 months to pay the rest. So the 18 months were getting over on 11 December, 2011. Reddy had to pay 75 percent of total price, that is, Rs 89 crore for the rest of the shares.

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On 10 December, Reddy sold 10.3 lakh shares he already had to a promoter group company for Rs 70 crore keeping in line with the market value at that time. He therefore paid Rs 70 crore from this transaction and an extra Rs 19 crore for the warrants.

The catch is:

Instead of the 10 lakh shares he sold, he received 30 lakh shares as part of the warrant. And this exchange, for the extra sum of Rs 19 crore he has paid, over and above the amount he received from the sale of his share. He had paid Rs 29 crore upfront as 25 percent of total value of shares. So altogether it goes up to Rs 48 crore.

In other words by selling 10 lakh shares in the market at Rs 680, Dr Pratap Reddy received 30 lakh shares at Rs 385. It seems market has assumed that the profit arising out of sales were used to reinvest in the warrants, thus bringing his cost much lower. This would have been the case had the promoter sold the shares to some funds or outside party. But here he has sold his stake to his own investment company, which means that the entire stake was funded by him.