Case 032Concentrated positions and liquidity eventsCore

A listed company's CFO holds shares worth 60% of his net worth as his lock-in ends. Build a staged sale plan of 25% a quarter within insider-trading rules, and show what a 40% fall would do to him with and without the plan.

The situation

Anirudh Bhat is chief financial officer of Ilavani Pharmachem, a listed maker of drug ingredients. His Ilavani shares are worth Rs 12 crore, 60% of a Rs 20 crore net worth; the other Rs 8 crore sits in his flat, funds and deposits. The shares cost him about Rs 2 crore through past stock grants, and a lock-in on them ends this month.

He believes in the company and does not want to look as if he is running for the exit. As an insider he can trade only when the company's trading window is open, needs pre-clearance, and must disclose his trades; confirm the current insider-trading rules with the compliance team before any plan.

Your task

Build a plan that sells 25% of the holding each quarter. Show his net worth after a 40% fall in Ilavani, with and without the plan, and say what the plan does and does not protect against.

Quick check

If Ilavani falls 40% before any sale, how much of Anirudh's net worth disappears?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Without a plan, a 40% fall takes Anirudh from Rs 20 crore to Rs 15.2 crore, down 24%; with two of the four quarterly tranches sold, he ends at Rs 17.6 crore, down 12%. Selling Rs 3 crore in each open trading window takes the stock from 60% of his wealth towards zero within a year. Staging limits the damage if the stock falls and the regret if it rises.

Step 1Why is this concentration a problem if the company is sound?

A family whose house, savings and salary all depend on one factory is exposed to that factory in three ways at once. Anirudh's salary, bonus, career and 60% of his wealth all ride on Ilavani, so a single bad event hits every part of his finances together. The question is not whether the company is good. It is whether any one company should carry that much of one family's future, and the answer is almost always no.

Step 2What does the plan look like inside the rules?

Sell Rs 3 crore, a quarter of the holding, in each of the next four open trading windows. Each sale happens after results are public, is pre-cleared by compliance and is disclosed, so the plan is both legal and visible. Many markets also let insiders file a trading plan in advance, which runs automatically and answers the charge of timing trades on inside knowledge. Provision tax as he goes: with a Rs 2 crore cost, each tranche carries about Rs 31.2 lakh of tax at an illustrative 12.5%.

One tranche per open window, four quartersclosedopen windowsell Rs 3 crQuarter 1held after: 9 crclosedopen windowsell Rs 3 crQuarter 2held after: 6 crclosedopen windowsell Rs 3 crQuarter 3held after: 3 crclosedopen windowsell Rs 3 crQuarter 4held after: 0 crClosed from quarter end until results are public; each sale pre-cleared and disclosed as the rules require.
Each quarter has a closed period from quarter end until results, then an open window; one Rs 3 crore tranche is sold in each open window after pre-clearance, so the holding falls from Rs 12 crore to zero over four quarters.
Step 3What would a 40% fall do, with and without the plan?

Without the plan, Rs 12 crore becomes Rs 7.2 crore and net worth falls to Rs 15.2 crore. If the fall comes after two tranches, only Rs 6 crore is exposed: it becomes Rs 3.6 crore and net worth falls to Rs 17.6 crore, half the damage. The Rs 6 crore already sold sits in a diversified portfolio that does not care what happened at Ilavani.

The same 40% fall, with and without two quarters of the plan, Rs croreNo plan: still holds Rs 12 crore20.0Before15.2-4.8After a 40% fallNet worth -24%Plan: two tranches of Rs 3 crore sold20.0Before17.6-2.4After a 40% fallNet worth -12%Ilavani sharessold, now diversifiedother assets, Rs 8 crore
A 40% fall in Ilavani takes Anirudh's net worth from Rs 20 crore to Rs 15.2 crore if he still holds all Rs 12 crore, but only to Rs 17.6 crore once two Rs 3 crore tranches are sold, halving the loss from 24% to 12%.

Now show the other side, because the client will raise it. If Ilavani rises 40% instead, he ends at Rs 24.8 crore without the plan and Rs 22.4 crore with it. Staging gives up half the upside and half the downside, which is exactly why it limits both regret and ruin. The limit to say plainly: a sudden fall before the first window opens is not protected at all. If he wants to keep a stake for alignment, stopping after three tranches leaves Rs 3 crore, 15% of his wealth.

Where candidates lose it

Candidates build a sale plan and forget that an insider cannot sell whenever he likes. Any plan that ignores trading windows, pre-clearance and disclosure fails before the numbers matter.

The other miss is computing the fall on the stock alone, 40%, rather than on his wealth, 24%. The client lives on his net worth, and the interviewer wants the number that matters to him.

What the interviewer asks next

  • Anirudh asks to hedge instead of selling. What would you look at, and what could stop him?
  • How would you handle the market's reaction to the CFO selling shares every quarter?
  • He has also pledged part of the holding for a loan. How does that change the plan?

Company names and figures are illustrative.