We keep getting queries about stocks that have crashed, like Opto Circuits and Gitanjali Gems; or those like Mascon Global, which became illiquid and eventually stopped trading. How can you stay away from such disasters?
At Moneylife, we routinely receive emails from investors asking about small stocks that they have bought only to find them sinking. In many cases, when the price begins to tank, these investors have bought more shares to average the price down, only to find the shares hitting a new low. They then write to us asking why is this happening and whether we can help. Here are two such recent cases.
Case 1 – The investor bought shares of Mascon Global at Rs50 apiece. After a few days the price started falling, and as many investors do, he bought more shares to “average the price down”. The price continued to fall heavily until it sank below a rupee; that is when he stopped buying the penny stock. At this stage his investments of Rs60,000 had already lost value. Now when he wants to exit, he cannot sell the shares since Mascon Global has stopped trading on both the exchanges.
Mascon Global was ramped up during the dotcom boom and was presumed to be connected to one of the sons of V Krishnamurthy, former chairman of Steel Authority of India. Mr Krishnamurthy, who has had a chequered career after SAIL, was at one time very close to Rajiv Gandhi. In the year 2000, the company had issued bonus shares in the ratio of three shares for every one share. Mascon Global also made a rights issue, launched several new ventures and did a few mergers and acquisitions with US based companies. Later, it turned controversial thanks to its connection with Ketan Parekh.
In its yearly income statement submitted to exchanges in March 2011, Mascon Global showed a loss of Rs431.39 crore. Shares of Mascon Global last traded on 19th April 2012 at Rs0.96.
Case 2 – This investor bought shares of Gitanjali Gems a few months ago at Rs600. The stock made a 52-week high on 23rd April at Rs649.70. It went down to Rs550 in mid-June. From there it has crashed to Rs183, locked in the lower circuit for the past nine sessions. Even if the investor wants to exit now, he will have to wait for the price to stabilise and some trading to take place.
Analysts have been suggesting that investors buy Gitanjali Gems for a price target of Rs742. Even at Rs462 they were recommending a buy.
There are many such examples. KS Oils made a 52-week high of Rs77 in January 2010, but the same month the scrip started falling and it has plunged by 90% since. Remember, KS Oils had received investments from some large PE funds. In May 2009, Rajat Gupta-promoted, Asia-focused New Silk Route (NSR) invested around Rs135 crore through preferential equity shares. Also, Citigroup Venture Capital and Baring Private Equity Partners Asia invested Rs49 core each through subscription to convertible warrants.
So what happened to this company? In its yearly income statement dated September 2012, the company recorded a net loss of Rs744.21 crore, despite huge sales figures of Rs3,386.49 crore, Some of the analysts recommended KS Oils with a price target of Rs76 in September 2010. They were very positive about it in their research reports, which are freely available across the web and after that they don’t even bother to look at the falling scrip. On 5th July 2013, KS Oils closed at Rs1.48 at BSE while on NSE it got delisted since 20 June 2013.
Zylog systems made a 52-week high in July 2012 at Rs340 and exactly after a year in July 2013 it made a 52-week low of Rs15. The stock plunged by 95%. Similar is the case of Opto Circuits (India). While the company’s stock was over Rs200 in April last year, it suffered a freefall of 80% in the last one year. On 31st May 2013, Opto Circuits opened at Rs51 and closed at Rs31.50, fall of 38% due to weak March quarterly results. On 5th July it closed at Rs21.70. Despite all this, ICICIDirect kept rosy target prices for Opto Circuits even as the stock was on a freefall.
What if someone is stuck with illiquid shares?
• BSE and NSE provide a facility to the market participants for online trading of odd-lot securities in physical form in ‘A’, ‘B’, ‘T’ and ‘Z’ groups (more about this below) and in rights renunciations in all groups of scrip in the equity segment. Both exchanges issue a list of illiquid scrip on a quarterly based on their respective websites.
• The exchanges have also arranged Periodic Call Auction (PAC) for illiquid scrips. Stock exchanges identify illiquid scrips at the beginning of every quarter and move such scrips to the PAC mechanism.
Well, what if you have shares that are delisted? You have no hope. You can try to use some brokers and dealers who are willing to buy delisted shares. You can sell it to them at a mutually agreed price but we have not checked out this service and cannot vouch for it.
How can investors prevent themselves from experiencing disasters we have described above? Here is what you should do:
• Anybody can make mistakes and so whenever you buy a share, especially a mid-cap or a small-cap stock, please have a stop loss in place.
• Luckily, there are some preventive measures taken by exchanges for the guidance and benefit of investors. Remember, BSE has classified companies into A, B, T, Z Groups in the equity segment on certain qualitative and quantitative parameters. Companies of A and B groups have large market capitalization. All blue chip companies are part of ‘A’ Group while other companies having a lower market capitalization—mostly midcaps are part of ‘B’ Group. ‘T’ Group represents scrip which is settled on a trade-to-trade basis as a surveillance measure. The 'Z' group includes companies which have failed to comply with its listing requirements or have failed to resolve investor complaints or have not made the required arrangements with both the depositories, viz., Central Depository Services (CDSL) and National Securities Depository (NSDL) for dematerialization of their securities.
So, if you are serious with your money try to stay focused on A group shares. Moneylife’s associate KenSource publishes a weekly newsletter on good quality stocks. You can check it our here.
• Moneylife publishes “Unquoted” – stories of price manipulation in every issue which can help you avoid stocks are being rigged.
Investors can prevent themselves from investing in stocks which have higher chances of failing. They can eliminate speculative activities by proper way of research and analysis. In almost all the examples we have highlighted, experts’ advice went wrong. Some of big PE investors, FIIs, venture capitalists, mutual fund companies also made wrong decisions. So, one cannot follow them blindly. Investors cannot outsource the job of assessing the risks associated with their investments, selection of right stocks, right time to enter and exit. - Vishrut Patel
Westlife Development has been locked in an upper circuit almost non-stop since January 2009. The reason: McDonalds' franchisee Hardcastle Restaurants became a direct subsidiary of this listed company. But why is it not classified an illiquid stock coming under the purview of the new call auction regulation?
Over the past seven trading days, the share price of Westlife Development has gone up by nearly 15% with just one share being traded every day. The stock has been hitting the upper circuit limit on each of the seven days. Over the past year the stock has moved up by over 3,531% from Rs7.88 on 21 May 2012 to Rs286 as on 3 July 2013. Excluding the bulk deals, on an average just 2-3 shares have been traded per day over the one year period. Westlife Development (Earlier named: Dhanaprayog Investments Co) used to offer investment and allied financial services, its license as a NBFC was cancelled in 2009. In December last year, Hardcastle Restaurants, the franchisee of American fast-food chain McDonald's, became a 100% subsidiary of Westlife Development. A company which is similar to Jubilant Foodworks? That’s what leading media houses think. A headline in the Economic Times reads, “Reverse merger makes McDonald’ franchisee parent Westlife Developments market darling.” A “market darling”, in which the ‘market’ cannot participate.
Three years back in June 2010, we had reported about the unusual trading and the huge surge in price at that time as well. (Read: Unquoted) Despite the poor financials, its stock price had gained 4,307% from 1 January 2009 to 27 April 2010. Trading volumes were suspiciously inconsistent over this period as well. There was no attractive business strategy that would sustain the price quoted. Obviously, some people knew what they were doing.
So what, rather who is driving this stock up to new highs? As per the latest shareholding disclosure dated March 2013, apart from the 12 shareholders that form the promoter group making up for 75% of the total shares, there are just 52 other shareholders of the company. Out of these 52 shareholders, four hold nearly 24.17% of the total number of shares. The remaining 0.83% of the shareholding (equivalent to approximately 1.50 lakh shares) is divided among the remaining 48 shareholders.
The BL Jatia group holds majority stake in Westlife Development. The Jatias have the McDonald franchise in India. There have been several bulk deals between the promoters - the most recent one on 19 June was the transfer of 6.30 lakh shares from Ushadevi Jatia to Amit Jatia. Earlier, the promoter Ushadevi Jatia had transferred 6.25 lakh shares to Smita Jatia, another promoter of the company. There have been several inter-promoter bulk deals in the past as well.
The market regulator recently came up with a regulation for illiquid stocks (Read: Curbing manipulation in illiquid stocks: Another harebrained idea by SEBI?). The company, however, is not classified as an illiquid stock despite the poor trade volumes. According to the watchdog, an illiquid stock is a stock that satisfies all of the following criteria:
1. The average daily trading volume of the scrip in a quarter is less than 10,000;
2. The average daily number of trades is less than 50 in a quarter;
3. The scrip is classified at illiquid at all exchanges where it is traded.
Strangely, this company has managed to escape the purview of this regulation even though, excluding the bulk deals, on an average just 2-3 shares have been traded per day.
The company in the past has delayed in making disclosure of changes in shareholding to stock exchanges as required under regulation 6(4) of SEBI Takeover Code, 1997. Vide a consent order the company reached a settlement to pay just Rs30,000 in April 2009. Moneylife has pointed out earlier that consent orders have been inadequate in curbing malpractices. (Read: Are SEBI’s consent orders a sham?).
Winmore Leasing & Holdings which is a part of the promoter group of Westlife Development also reached a settlement of Rs1 lakh through a consent order in July 2009 for failure in making disclosure of shareholding/changes in shareholding to stock exchanges as required under regulations 6(2),6(4) for year 1997 and 8(3) for years 1998 to 1999 of SEBI Takeover Code, 1997.
Stock manipulation in the Indian market is rife. In every issue of Moneylife magazine we publish details of one such stock being manipulated in the ‘Unquoted’ section. Regulators may pretend that all is fine with the Indian markets but you would be astounded by the extent of price manipulation that goes on regularly under the nose of the market regulator Securities and Exchange Board of India (SEBI) and the two main stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). We have written a cover story as well on this issue (Read: Stock Manipulation). The regulator is unconcerned.