In a surprise move, SEBI has changed the rules of its controversial and harebrained PCAS system. It seems to have realised its folly, and has now excluded profitable companies from the ambit

The Securities & Exchange Board of India (SEBI) seems to have woken up to its poor decision making, perhaps too late. On Friday, it announced new measures to “rationalise” its controversial periodic call auction system (PCAS), a (then harebrained) scheme hatched to prevent stock manipulation and supervise illiquid stocks. According to the new system, which is better than the old one, (), the PCAS would now exclude profitable and dividend paying companies. This means unprofitable, illiquid and penny stocks would now come under the new PCAS ambit.
 

 According to the new circular, companies would be excluded from PCAS if:

a) A scrip is having more than Rs10 crore average market capitalisation;

b) A company has paid dividends at least two times during last three years;

c) 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.
 

Moneylife had earlier pointed out that many good companies would come under the PCAS because they would not satisfy the older criteria set by SEBI. For instance, earlier, way back in June, we had written of the absurdity of the PCAS system in which a single trade wiped off Rs1.72 crore of market capitalisation of Hind Industries, a then healthily traded small-cap stock (even good small cap stocks are thinly traded). Suddenly, it was declared ‘illiquid’ overnight and shifted to the PCAS. Not only did it carry a stigma but it was made more prone to stock manipulation! This caused losses to shareholders who suddenly saw their wealth eroded in one shot.
 

This also shows how deeply flawed and shallow SEBI’s approach is to curbing illiquid stocks and stock manipulation. The market regulator spent over Rs50 crore of taxpayer’s money on elaborate surveillance monitoring systems to detect such stock manipulation. Of those companies caught by SEBI, many are let off the hook through its consent order mechanism, while at the same time small shareholders are left to suffer losses for no fault of theirs. The SEBI consent order mechanism is a form of disgorgement where unscrupulous promoters pay a sum of money to the market regulator and are let off the hook without admitting any guilt. However, SEBI doesn’t use the disgorgement to repay retail shareholders. Instead, it uses it to fatten up its own kitty. Shyam Sekhar, an avid market watcher opined on Twitter: “Disgorgement should also apply to regulatory oversight. This is the only way to bring responsible regulation.” He further tweeted: “SEBI virtually pulls the curtains on PCAS. But the officials who drafted must be sued for causing wilful loss to small investors.”  
 

With the new rules instead of the 2000+ or so odd stocks that were brought under the ambit of PCAS (BSE has 2337 stocks as of current quarter), it is expected that the number would come down. This means that the PCAS system with fewer stocks to supervise using SEBI’s ultra-expensive monitoring system would be needless. Even then, the trading segment would be dead. Jigam's blog states: “Now PCAS will be a dead segment and now it will die a natural death in long run, because now there won’t be many companies in PCAS and they would be very illiquid.”
 

Will the new rules make any difference? No matter what the rules are, SEBI still needs to catch unscrupulous promoters and boost supervision, for which it has been failing. Moneylife routinely writes about many such stocks, in the every issue of the magazine’s Unquoted section Moneylife, where stock prices either have rocketed or cratered without any respect to stock fundamentals. Moneylife also carried an exclusive Cover Story last year, which saw many stocks rising and falling right under the nose of SEBI.