Investors lose billions amid Stock Exchange confusion

The shares of Banca Romana pentru Dezvoltare (Romanian Development bank – BRD) yesterday went through the most spectacular and confusing trading session since their first day on the Bucharest Stock Exchange. To some investors (including brokers and clients of Romania’s biggest brokerage firms), this confusion meant losses of several billion ROL, while others gained just as much.
At the beginning of yesterday’s session, all the brokers and investors dealing with BRD shares were grinning, despite the paradoxical situation. Some were selling shares for 17,000 ROL, while the others were buying for 22,000 ROL and everybody was sure it was the right thing to do.
“Read the release very carefully! Those buying for 21,000 ROL must be out of their minds!” said a trader of a foreign brokerage company, which estimated the right price at 15,000-16,000 ROL.
“I simply cannot understand why they are selling. The price should not have dropped under 25,000 ROL,” said another broker, who had already bought thousands of BRD shares for 21,000-22,000 ROL.
One hour later, those who had sold for 17,000-22,000 ROL were busy explaining the decision to their angry clients, while the buyers could not have been happier. If the transaction is validated, one investor lost 350,000 dollars in a single day.
It all started from a misunderstanding regarding the face value of a BRD share: 3,000 ROL or 5,000 ROL?
Last week, BRD said it would grant 0.2 new free shares for every old share. According to the announcement summoning the Extraordinary General Meeting of Shareholders (EGM), the investors included in the Shareholders Registry by November 20 were to benefit from this increase. For the capital increase to be operated without running into decimal problems, BRD set a rather unusual procedure: the shares (with 5,000 ROL in face value) were to be split into shares with 1,000 ROL face value, then a free share with 1,000 ROL in face value was to be granted, only to be regrouped into shares with 3,000 ROL nominal value, afterwards. In brief, those who bought BRD shares by Friday (three days are needed to be included in the shareholders registry) will receive two shares with nominal value of 3,000 ROL, instead of one share with 5,000 ROL face value.
Following the announcement, due to the free shares, the BRD stock went up last week from 28,000 ROL to more than 31,000 ROL. Friday’s closing price was 30,400 ROL.
All market players were expecting the share price to go down yesterday, as the last day of free share granting had passed. That is also why the Stock Exchange suspended the 15% normal price variation limit in a trading session.
At the beginning of yesterday’s session, one investor rushed to sell 1.6 million BRD shares, in a special transaction, accounting for 0.2% of the bank’s capital. The price was 17,000 ROL, down 44.07% since Friday.
At the same time, other investors bought shares for 22,000 ROL and were even surprised that they could find sellers.
But what triggered these wide gaps, which made the sellers lose several billion ROL and confused even the biggest brokerage companies in Romania?
Depending on the interpretation of the EGM announcement, some thought the face value of a share was 5,000 ROL, while the others swore it was 3,000 ROL. The confusion can be blamed on the EGM announcement, which fails to state clearly the exact time when the share face value becomes 3,000 ROL.
Some investors thought it was the reference date (November 20), while others said the 3,000 ROL face value could only be enforced after the bank operates the changes, that is after the EGM scheduled for November 29.
Close to the session’s end, BRD issued a release, saying the face value was still 5,000 ROL, while those having bought shares were not going to benefit from the capital increase. However, they would receive 1.66 new shares upon splitting, with a face value of 3,000 ROL.
“The EGM announcement comprises two different aspects: the capital increase (which will benefit only those having registered by November 20) and the split (which will include all those who buy shares until the operation is effectively performed). Consequently, the face value of a BRD share is 5,000 ROL,” Florin Luca, BRD general secretary told Ziarul Financiar.
However, the release came too late, close to the session’s ending. Many investors had already lost several billion ROL, selling for a price that considered a face value of 3,000 ROL.