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Moneylife » Investing » Regulations » SEBI rationalises periodic call auction mechanism

SEBI rationalises periodic call auction mechanism

Moneylife Digital Team | 20/12/2013 06:37 PM | 

SEBI’s new circular includes modifications in the trading criteria of illiquid scrips in periodic call auction, based on the company’s market capitalisation and profitability
Market regulator Securities and Exchange Board of India (SEBI) has modified certain conditions on periodic call auction mechanism by modifying how it classifies the so-called illiquid stocks, including modifications based on market capitalization and profitability in the trading criteria on illiquid scrips.
A stock would now be classified as illiquid if its average daily turnover is less than Rs2 lakh in the previous two quarters and if it is classified as illiquid at all the exchanges where it is traded. Call auctions will not apply to shares where a company is profitable in at least two of the past three years and not more than 20% of promoters' shareholding is pledged in the latest quarter and the book value is three times or more than the face value. The new rules also exclude companies with a market capitalisation of at least Rs10 crore or which have paid a dividend in at least two of the past three years, SEBI said.
SEBI in its circular dated 19 December 2013, rationalised its periodic call auction for illiquid scrips as per feedback of market participants and recommendations received from Secondary Market Advisory Committee (SMAC).
Earlier, Moneylife had pointed out that periodic call auction regulation would result in decline in retail investors and good quality small companies would be marginalised. 
The following are the modifications:
1. A scrip will be classified as ‘illiquid scrip’ at all the exchanges it is trading, if its average daily turnover is less than Rs2 lakhs during previous two quarters
2. Scrips can be excluded if it follows any of the conditions:
a. If a scrip is having more than Rs10 crore average market capitalisation;
b. If a company has paid dividends at least two times during last three years;
c. If a company is profitable at least two out of the last three years and not more than 20% of the promoters’ shareholding is pledged in the latest quarter, and its book value is three times or more than its face value
3. Stock exchanges shall move scrips from periodic call auction mechanism to normal trading session if the scrip has remained in periodic call auction for at least one quarter (earlier it was two quarters);
4. Stock exchanges may determine the number of call auction session for illiquid stocks. There shall be at least two sessions in a trading day with one uniform closing session across the exchanges in order to have minimum trading sessions and uniform closing session.
SEBI in its circular said that, all other conditions for trading in periodic call auction sessions contained in earlier SEBI circulars, dated 14 February 2013, 17th September 2010 and 15th July 2010 will remain unchanged.
SEBI has directed all the exchanges to take necessary steps to implement all new modifications from the beginning of the next quarter with making necessary amendments to the relevant bye-laws, rules and regulations. SEBI has also directed exchanges to bring this circular to the notice of all the member brokers of the exchanges and put it on its website.
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Jubin Jose

Jubin Jose 2 years ago

I appreciate SEBI's move to correct their mistake. It really great that they listen to Market Participants.

Jubin Jose

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Bosco Menezes

Bosco Menezes 2 years ago

Vijay Shah, not sure if you are recommening a single Call Auction session a day, or a single continuous trading session.

Given that PCAS is set to continue, albeit with fewer stocks, i too would like ideally to have at least one continuous session a day for the scrips that continue in PCAS.
So we can have either an opening Call Auction session, to arrive at a stable open price followed by a continuous session (pending orders of opening session can be c/f to continuous session), OR a Continuous session followed by a Call Auction session to fix the stable closing price (again pending orders can be c/f).

However a read of the new guidelines suggests there is NO SCOPE for any continuous trading session.

So some key negative elements of the CAll AUction session (such as creating false demand/supply picture only to remove the misleading orders at the fag end of the order entry session) will continue, albeit for a lesser number of scrips.

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VIJAY SHAH 2 years ago


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Nilesh KAMERKAR 2 years ago

Simply reversing the decision would rectify the situation . . . but it may not be easy now.

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Bosco Menezes

Bosco Menezes 2 years ago in reply to Nilesh KAMERKAR

Nilesh, i agree. Most logical situation would have been to reverse the earlier decision.
New guidelines while allowing (presumably) a majority of scrips to escape the system, still has elements of arbitrariness. For example :
(1) Criteria of Rs 2 lakh daily avg turnover again seems arbitrary, and rather high in respect to small caps. Many good small caps with small equity & high promoter shareholding, and which invite "investment" interest, rather than "trading" interest, and which have been historically trading a few hundred to a few thousand shares daily, may still not meet the new criteria, thus requiring the use of the 3 additional conditions to escape PCAS. Thus they will still attract the "Illiquid" tag, though many will espace PCAS.
(b) Again, by keeping the bar at 10 Cr market cap, is SEBI suggesting that most manipulation happens in sub 10Cr MCap category ? I dont think so ...
But anyway, we must be thankful for small mercies :-)

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Nilesh KAMERKAR 2 years ago in reply to Bosco Menezes

If a security is illiquid then so be it. Investors have to live iwth it. It is nobody's job to insist / ensure liquidity.

Moreover, liquidity does not matter as long as trading takes place in a fair manner and at any time during trading hours.

If a stock is illiquid, it also means current owners are not keen on selling their holdings. Why punish them. - by restricting the trading window.

Why would anybody want to encourage trading at the cost of long term investing???

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Bosco Menezes

Bosco Menezes 2 years ago in reply to Nilesh KAMERKAR

Absolutely right, Nilesh. I could not have put it better.

Why indeed would anyone want to encourage trading at the cost of long term investing !!

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Hemant 2 years ago

Insted of scraping the whole stupid system,to save the face they just modify the system.Any way now hardly any worthy companies will remain under PCAS.Thanks for highlighting the problems faced by every one.

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Bosco Menezes

Bosco Menezes 2 years ago in reply to Hemant

You are right, Hemant . Correct approach would have been to scrap the system alltogether. But that would have meant owning up to the total fiasco, which dealt a severe blow to the small & mid-cap market. No one honestly expected that , so i guess this approach was the next best alternative.

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