SEBI’s new regulation leads to crash in stock at ridiculously low volumes
Moneylife Digital Team 09 April 2013

As SEBI’s new directive to tackle manipulation on so called ‘illiquid’ companies goes into enforcement, there has been widespread wealth destruction even amongst good companies which are ‘illiquid’

It is shocking to learn that some of the well-known companies have suffered a nasty downfall in their share prices on their first day of being marked as ‘illiquid’ on the bourses. Shares of companies like Fame India, Advanced Micronic Devices, Thiru Arooran Sugars, Pacific Industries, Bimetal Bearings, Ruchi Strips, Veejay Lakshmi, Medicamen Biotech, Kerala Ayurveda, Vardhman Holding, Premier Explosives, DCM Shriram, all suffered humiliating falls.

Check the table below for the prices of the above-mentioned stocks traded on the BSE

Name of Scrip

2-wk Avg Volume

Quantity Traded on 8th April 2013

Percentage Change

Ruchi Strips




Medicamen Biotech




Pacific Industries




Kerala Ayurveda




Bimetal Bearings




Fame India




Thiru Arooran Sugars




Advanced Micronic Devices




Vardhman Holding




Veejay Lakshmi




Premier Explosives




DCM Shriram





As you can see, the stocks have been pummeled really badly. Not only did they fall hard, but their trading volumes were battered as well. Notice that their quantity traded on the first day in the new call auction window is far less than their two weeks average (which happens to be reasonably healthy for stocks termed as ‘illiquid’). If prices of fundamentally good companies are slaughtered for no reason, there is also no reason why an investor should stay invested in future should some other good company become ‘illiquid’.


To recap, in the new periodic call auction system, once investors get familiar with the nuances, there will be a concentration of activity in the last few minutes of the 1st part of the session, i.e. the 45 minutes reserved for Order Entry, Modification & Cancellation.

This is because orders can be changed or cancelled till the very end of this 45 minute session, which can result in the shifting of the "equilibruim price" at which the orders will be struck. So the last few minutes of this part of the session, i.e. the business end, is when investors will need to be trading online, or else in contact with their brokers, to be able to react to what other participants are doing, to give their order the best chance to be executed.


So there is bound to be frenetic activity in these few minutes. Some brokers may even refuse to trade in such scrips fearing that market regulators will be onto them for rigging. Some may even decline their customers’ orders on similar grounds. A combination of all this will exacerbate the liquidity scenario. This is also antithesis of free market capitalism where brokers and customers are free to place an order at their time of liking.


Following the close of the 45-minute Order Entry period, next part of the session is the Order Matching & Trade Confirmation Period of 15 minutes (including buffer of upto 7 minutes to facilitate transition between 2 call auction sessions). If the trade is not executed within this period, the trade stands cancelled and the broker has to punch an order once again.

The call auction allows trading of such illiquid stocks only for eight minutes every hour. If the trade is not executed within the hour, the trade stands cancelled and the broker has to punch an order once again.

Also, such a move may affect the cash segment as a whole. Investors seeking value in small and promising companies (some of them run by entrepreneurial families) will now get discouraged having seen how the first day panned out for good companies. This may lead to gradual erosion of investing in the cash segment of the market. Instead, exchanges are pushing hard for derivatives segment. We also had written about this here: SEBI’s move may reduce liquidity in BSE’s cash segment?

As SEBI’s new directive goes into force on 8 April 2013, the exchanges have shifted all the so-called “illiquid” stocks to a separate trading window. As many as 2,050 companies (Bombay Stock Exchange declares 2,050 companies as ‘illiquid’) have been shifted there. Some of the companies mentioned above are part of this list, as well. The exchange will re-evaluate the eligibility of such stocks to be traded in the ‘normal’ segment every quarter.

Abhay Munot
1 decade ago
I agree with the premise of this article. I am an Overseas Citizen of India residing in USA. Ever since this regulation came into effect, I am not able to place any After market orders for such scripts with my broker in India. Does SEBI expect me to stay awake at night just to place order in these stocks? 40% of my portfolios is invested in small cap stocks because they offer compelling valuations. SEBI has overnight managed to reduce its value substantially. I can't faithom SEBI's stupidity in implementing this regulation. I have already written an email to SEBI about it though I am not optimistic about getting any response. I would urge everyone especially influential personalities like Sucheta Dalal to raise their voice about this injustice by SEBI.
1 decade ago
Like the direct plan in mutual funds, why can't there be a option to buy shares DIRECTLY from the respective companies?

Some kind of 'treasury stock' can be maintained by the company for this purpose.

If direct plan is good for investing in mutual funds, how can it be not good for investing in shares?
Replied to Nilesh KAMERKAR comment 1 decade ago
Good suggestion. Companies can have a Trading Stock of its own shares , to support liquidity in the market. It can act as market maker .Promotors can demarcate , say 5% equity, and offer a two way quote . I appreciate this idea.
1 decade ago
It is sheer foolishness on the part of SEBI to have implemented this harebrained idea without sufficient public debate. The outcome is disastrous. Blue chip companies like Rossell India, Eimco Elecon, Bimetal bearings, International Combustion etc have been classified as ILLEQUID where as penny stocks , which are traded in million shares a day, are included as Liquid. There should have been better criteria parameters , like profitability, dividend history to determine illequid stocks. The Value Investor, who researches for such value , is now in a big soup because stocks can be easily manipulated in a low volume stock ! This is counter productive . Is SEBI reading these comments ? I wonder
1 decade ago
If this is the only reason, the chaps who play theen pathi on the suburban are dumber than I thought. Come on! The Macros are appalling. Inflation, deficit, leakages (corruption), balance of payments.... Nifty should be hoverin arounf 4,000!
ashwin bahl
Replied to SuchindranathAiyerS comment 1 decade ago
Spot on
and add the woes of a Government, is it in or is it out or does it exist at all? All we hear is Congies big wigs fighting for their battered image daily ! It is not sound governance, is it ?
Replied to SuchindranathAiyerS comment 1 decade ago
very well said.
1 decade ago
Instead of than infusing liquidity in illiquid stocks, investors will now be trapped, & choked out.

Bosco Menezes
Replied to Nilesh KAMERKAR comment 1 decade ago
Nilesh, HDFC Securities is not allowing to trade online in these scrips from yesterday. Cannot even view the quotes in their market watch. Am told that some other brokerages too are reluctant to allow trades in these scrips. Let's see what happens.
I feel the new system should be suspended , either for good, or till (a) a new criteria of illiquidity is agreed (with public input) + (b) practical difficulties faced in India (where many users may not be online/internet savvy, or not in a position to participate easily multiple times a day from their workplace) are addressed adequately.
Keeping fingers crossed.
Replied to Bosco Menezes comment 1 decade ago

The way to work around this 'trap', is to invest only those funds which are surplus and can be put to work for long periods of time.

One good thing is, this will make investors behave like investors. The legendary investor Warren Buffett famously said " Only buy something you will be happy to hold if the market shut down for ten years".
- Thank God this is not that bad.

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