SEBI’s new regulation leads to crash in stock at ridiculously low volumes

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

1454

200

-18.96%

Medicamen Biotech

4767

51

-18.63%

Pacific Industries

142

74

-17.59%

Kerala Ayurveda

9340

5

-14.81%

Bimetal Bearings

131

105

-13.81%

Fame India

1080

10

-11.27%

Thiru Arooran Sugars

14468

8

-11.26%

Advanced Micronic Devices

2255

200

-10.40%

Vardhman Holding

256

1

-10.26%

Veejay Lakshmi

643

1

-9.94%

Premier Explosives

5404

301

-8.94%

DCM Shriram

1405

42

-8.73%

 

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.

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COMMENTS

Abhay Munot

6 years 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.

Nilesh KAMERKAR

6 years 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?

REPLY

sachchidanand

In Reply to Nilesh KAMERKAR 6 years 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.

sachchidanand

6 years 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

SuchindranathAiyerS

6 years 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!

REPLY

ashwin bahl

In Reply to SuchindranathAiyerS 6 years 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 ?

PRABAL BISWAS

In Reply to SuchindranathAiyerS 6 years ago

very well said.

Nilesh KAMERKAR

6 years ago

Instead of than infusing liquidity in illiquid stocks, investors will now be trapped, & choked out.


REPLY

Bosco Menezes

In Reply to Nilesh KAMERKAR 6 years 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.

Nilesh KAMERKAR

In Reply to Bosco Menezes 6 years 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.






Bombay Stock Exchange declares 2,050 companies as ‘illiquid’

The Bombay Stock Exchange has identified those stocks which are illiquid as per SEBI’s new definition and will move them to a separate trading window which will begin from 8th April. Some well known companies are also in the list

Acting on a recent directive from the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange (BSE), vide notice 20130401-39, has shortlisted all the ‘illiquid’ stocks and moved them to a separate window which will be traded from 8  April 2013.
The number of such stocks is 2,050 and represents over 50% of the ‘actively’ traded stocks on BSE! Some of the illiquid stocks which maybe familiar to investors include Dr Agarwals Eye Hospital, Asit C Mehta Financial Services, SKP Securities, Almondz Global Securities, Lumax Automotive Systems, Allsec Technologies, Bannari Amman Spinning Mills, Indus Fila, Rane Brake Lining, Rane Engine Valve, Ginni Filaments and Khaitan (India).
 

As per our analysis on the BSE website, the total number of stocks on BSE is 6,922. Out of this, only 3,888 stocks (including ETFs and such) are ‘active’, while 1,312 stocks are suspended and 1,722 stocks are delisted. The number of so called ‘active’ stocks is little over 50% of the BSE’s entire universe. This means, only 1,838 or just 26.55% of the entire BSE universe will be remaining and actively traded in the ‘normal’ segment of the exchange, if the illiquid stocks are moved to a separate window.
 

The implications of this move could be far reaching. This will further reduce the number of stocks traded on the exchange, making it difficult for investors to invest in niche or specialised companies (which are normally illiquid).
 

We had written about this in an earlier post. You can read about it here: Curbing manipulation in illiquid stocks: Another harebrained idea by SEBI?
 

The illiquid stocks which have been shortlisted will be moved to the “periodic call auction” window from 8 April 2013 onwards, where marketmen can trade on such stocks. The liquidity situation will be monitored by the exchanges every quarter. Every quarter, the exchange will review liquidity and add or remove stocks from the normal segment to the so called “periodic call auction” window where illiquid stocks are traded.
 

These stocks which are part of the 2,050 illiquid stocks, according to BSE, have failed to meet SEBI’s criteria for meeting definitions of liquidity for the quarter ended March 2013. As per SEBI circular no. CIR/MRD/DP/6/2013 dated 14 February 2013, a scrip is shortlisted as illiquid if all the following conditions are met: 
 

  • The average daily trading volume of a scrip in a quarter is less than 10,000;  
  • The average daily number of trades is less than 50 in a quarter;  
  • The scrip is classified as illiquid at all exchanges where it is traded.

 

The entire list of 2,050 stocks can be found here: (click here)

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COMMENTS

VIJAY SHAH

6 years ago

NEELAMALAI AGRO INDUSTRIES LIMITED (INCORPORATED ON 21-04-1943) HAVING NEARLY 1600 ACRES OF TEA ESTATE IN COONOOR (INDIA).THE SERIAL NUMBER IS 381 IN ILLIQUID LIST AND THE BSE CODE NUMBER IS 508670. THIS COMPANY IS NOT TRADED IN THE LAST TEN MONTHS THAT IS FROM 21-02-2013 AND THE STORY IS NOT OVER YET ONE MARKET LOT IS OF 100 SHARES AND THE PRICE IS 1200 PER SHARE THAT IS 1200 X 100 = 1,20,000. THIS IS EVEN MORE DIFFICULT THAN BOMBAY OXYGEN CORPORATION LIMITED (INCORPORATED ON 3-10-1960) HERE ONE MARKET LOT PRICE IS OF NEARLY RUPEES 28270/- THAT TOO IN PHYSICAL FORM (2nd HIGHEST IN BSE). SO HOW CAN ONE RETAIL SHAREHOLDER CAN BUY A STOCK OF IT, HAS THE BOMBAY STOCK EXCHANGE (INCORPORATED ON 9-7-1875) HAS ANY ANSWERS TO IT?

ASHOK M SHAH

6 years ago

Dear All,
No of trade and TOTAL No of shares get traded depends upon SMALL or LARGE Eq Capital and also on Face value of share and stock price also.
But SEBI formula has put all Co in one single category with Rs.3 Cr capital and Rs.30 Cr eq capital.
SEBI should come out with SPECIAL COMPULSORY DELISTING offer for investor for all this stocks as they have power to tackle all Co for benefits of investors.

Bosco Menezes

6 years ago

Got a shock today as HDFC Securities with which i have my online trading account is not allowing online trading in these "illiquid" scrips !!

I rang the Customer Care number of HDFC Securities & the representative informed me that such scrips can no longer be traded through on-line trading, they have to be traded via tele-broking (call-n-trade) !!

Whether this is a permanent situation, or temporary, the representative could not say. So i have written to the customer care email id asking this question, and for resolution to this problem. Got an automated reply that they will get back within 1 business day.

Anyway, looking at the trading in these iliquid scrips today, it does seem like even the existing liquidity has been curtailed. Whether this will improve after people get used to the new system is to be seen. In 3-6 months we will know for sure.

VIJAY SHAH

6 years ago

THE ONLY ONE ADVANTAGE IN INVESTING IN INDIAN EQUITY MARKETS IS “ALL LONG TERM CAPITAL GAINS IT ATTRACTS ZERO PERCENTAGE TAX” THAT IS HOLDING SHARES FOR MORE THAN 365 DAYS

VIJAY SHAH

6 years ago

NO PROBLEM BOSCO SIR, THE INVESTORS SHOULD ALWAYS FOLLOW THE GOLDEN RULE WHILE INVESTING IN THE EQUITY MARKET THAT IS THE LAW OF FARM; A SEED HAS TO GROW IN DIFFERENT SEASONS. BESIDES THIS ALWAYS REMEMBER THE 3R THAT IS THE RIGHT BUSINESS, THE RIGHT MANAGEMENT AND THE RIGHT PRICE. ALWAYS BE PATIENCE WHEN OTHERS ARE GREEDY AND WHEN OTHERS ARE FEARFUL BE LITTLE GREEDY.

Bosco Menezes

6 years ago

Thanks Adi, Vijay for bringing out additional aspecst of this issue.
The new rules besides affecting shareholders of the so-called "illiquid" group negatively, could also impact all other investors. Because if an investor needs to take money out of the market and finds it too hard to liquidate an "illiquid" stock because of the new rules, he will sell a "liquid" stock instead. So even investors who do not hold these "illiquid" stocks will be affected to that extent.

VIJAY SHAH

6 years ago

HATS OFFS TO LATE DR TILAKRAJ DEWAMAL MEHTA (AGE 75 YEARS) FOR FLAT PRODUCTS EQUIPMENTS INDIA LIMITED (FPE) INCORPORATED ON 28-5-1986 FOR THE VALUE CREATION AND SHAREHOLDERS INTEREST HE HANDED OVER THIS COMPANY TO BELGIUM BASED COCKERHILL MAINTENANCE AND INGENIERIE (CMI) AND MAKING IT CMI FPE LIMITED ON 23-9-2008. THE BOMBAY STOCK EXCHANGE HAS FORGOTTEN LATE DR TILAKRAJ DEWAMAL MEHTA’S EFFORTS AND HIS HARDSHIP IN SETTING AN INDUSTRY IN ANDHERI AT THE AGE OF 52 YEARS. IN PAST HE ALSO WORKED HARD IN TATA STEEL, JAMSHEDPUR. THE REASON HE HANDED OVER HIS COMPANY WAS OLD AGE AND ILL HEALTH. TODAY HIS WIFE IS A TOP SHAREHOLDER NAMED NISHI TILAKRAJ MEHTA HOLDING 97000 EQUITY SHARES APPOXIMATELY. CURRENTING SHE IS STAYING IN JUHU, MUMBAI

VIJAY SHAH

6 years ago

FORGET ILLIQUID STOCKS A 52 YEARS OLD COMPANY NAMED BOMBAY OXYGEN CORPORATION LIMITED WAS INCORPORATED ON 3-10-1960 IN MUMBAI (BSE CODE NUMBER 509470) AND (SERIAL NUMBER 416) LISTED IN BOMBAY STOCK EXCHANGE IS NOT AVAILABLE IN DEMATERALISE FORM. THE COMPANY SHARES ARE AVAILABLE IN THE LOTS OF 5 (SHARES) COSTING RUPEES 26 400/- (RUPEES TWENTY SIX THOUSAND FOUR HUNDRED ONLY)

Adi Daruwalla

6 years ago

Another thing that is surprising is why SEBI gets the wake up call now. Was there no EWAC (Early Warning and Avoidance System) to stem the junk and rot from the BSE or are they playing only with numbers as al number crunchers do ?? And how did these scrips continue to exist on the bourse??

Adi Daruwalla

6 years ago

Classifying them as illliquid is ok. But many stocks on this list are not being dematted by banks. So selling has to happen in physical mode. 25 transfers are sold for INR 75/= by the BSE. Plus franking difficulties for the transfer fees. Attaching self signed PAN cards.
Signature mismatch at registrars end, objections, give signature verification from nationalized banks. So if demat is permitted in all these stocks,(only those that trade above the face value of INR10/= or whatever the face value.) Only those should be dematted. The rest are a waste and junk and we dont know when they will recover if ever...

Nilesh KAMERKAR

6 years ago

Just 27% of the liquid stocks are liquid. Thus the stock exchange itself becomes 'illiquid'.

Now will the stock exchange be auctioned off through some separate window?

Ashok Visvanathan

6 years ago

They should not have 10000 shares as fixed. It should be a fraction of the free float.

REPLY

Bosco Menezes

In Reply to Ashok Visvanathan 6 years ago

In fact, Ashok, several hundreds of small caps have been trading few hundred shares to a couple of thousand shares daily, historically. 10k shares would be traded in these stocks only maybe few times a year, maybe in reaction to results etc. People buying these stocks have not bought them because they are "liquid". Now suddenly they are declared "illiquid" & moved to the new mechanism whereby shareholders now have to face the consequences.

Nilesh KAMERKAR

In Reply to Bosco Menezes 6 years ago

Please do take a look at some positives too.(For more could have been lost)

1)The recommendation could very well have been to extinguish shares because they are 'found' to be illiquid & mostly owned by 'outside' shareholders who also happen to be retail investors .

2)The retail investor's interest is being protected by allowing him to let him keep his illiquid shares.( by not forcing him to sell within some stipulated time)

3)Finally lets be grateful, the retail investor has not been burdened with the responsibility of creating liquidity in these illiquid shares






Bosco Menezes

In Reply to Nilesh KAMERKAR 6 years ago

Lol ..... while in a lighter vein, heres one from my side too : Investors should apply to their DP's to RE-materialise shares (get physical certificates), as they will be holding for a long long time. That way they will save on demat a/c charges :-)

ASHOK M SHAH

6 years ago

Yesterday 2456 shares were traded on BSE So from 8th,13 2050 would be illiquid stocks So does that mean stock market has 80 % illequid stocks and SEBI wants to certify that 80 % stks are not managed by us as a regulator and hence to control regulation better stop trading and hence its not required to manage stocks and enjoy life as a regulator.

ASHOK M SHAH

6 years ago

Yesterday 2456 shares were traded on BSE So from 8th,13 2050 would be illiquid stocks So does that mean stock market has 80 % illequid stocks and SEBI wants to certify that 80 % stks are not managed by us as a regulator and hence to control regulation better stop trading and hence its not required to manage stocks and enjoy life as a regulator.

ASHOK M SHAH

6 years ago

Yesterday 2456 shares were traded on BSE So from 8th,13 2050 would be illiquid stocks So does that mean stock market has 80 % illequid stocks and SEBI wants to certify that 80 % stks are not managed by us as a regulator and hence to control regulation better stop trading and hence its not required to manage stocks and enjoy life as a regulator.

Royalty hikes by foreign consumer companies to impact minority shareholders

Rising royalty on their Indian operations will remain an overhang for the stocks of foreign consumer companies

The Indian consumer sector is a long-term growth opportunity led by growing incomes and increasing propensity to spend. It is dominated by foreign consumer companies which have been excellent long-term value creators. But now several foreign consumer companies are imposing royalties on their Indian operations.

 

Hindustan Unilever and Nestle India have already revised royalty rates, while Colgate and GSK Consumer are sitting on the fence. While it is difficult to predict the timing of any potential change in royalty rates, it will remain an overhang for the stocks. This is according to Nomura Equity Research in its report on the Indian consumer sector.

 

The idea behind the royalty hikes is that the Indian subsidiary needs to pay more to get access to the parent company’s technology and R&D capabilities and the right to leverage on the global portfolio in India. The increase in both the cases is a gradual change, which cushions the burden on minority shareholders. While it is difficult to conclusively say if the increase in royalty rates is justified, it does take out the near-term uncertainty over these companies. However, in the long-term, it does raise the question on how the move will impact the interests of minority shareholders, says Nomura.

 

The net impact on earnings is not much, according to Nomura’s analysts. While there will be some impact on earnings both for Hindustan Unilever as well as for Nestle India of the increases in royalty rates, the quantum will not be large. For Nestle India, the increase will kick in only on 1 January 2014, and for Hindustan Unilever, the increase in royalty rate will be 50bps (basis points) each year for the next two years starting 1 April 2014. The companies will also have the option of passing on these increases to consumers at an appropriate time. Royalty rates are high in the consumer sector relative to other sectors.  Even if we look outside the consumer sector, there are a large number of listed subsidiaries of MNCs (multinational companies) which pay royalties to the parent. Some of the more prominent names and the royalty rates for them are below.  Excluding Maruti, the royalty rates paid by both Nestle India and Hindustan Unilever are higher than those paid by companies in other sectors. 

 


Valuations of consumer companies continue to remain at high levels relative to their long-term average. Within MNC companies, Hindustan Unilever, Nestle India, GSK Consumer and Colgate Palmolive trade at an average 26.1x FY15F (Nomura’s estimate), about 23% premium versus domestic consumer companies. While the companies have historically traded at a premium to domestic companies, the premium has shrunk over the past five years. If over the longer term royalty rates continue to rise, MNC firms are likely to become less attractive to minority shareholders. However, there is no risk in the medium term, as MNC companies continue to have a more complete portfolio of brands and have a significant head start versus domestic companies in the segments in which they operate in.

 

Nomura continues to prefer ITC among large cap consumer stocks, where visibility of earnings growth is much higher. It expects ITC to pass on the recent rise in excise duty and VAT (value added tax) in certain states by way of price hikes. Its long-term target of growing the cigarette business EBIT (earnings before interest and tax) by 15%-16% remains intact and is supported by valuations of 23.4x versus Hindustan Unilever at 25.7x and Nestle at 25.1x. In mid caps, Nomura prefers Emami which should deliver an 18% earnings growth over the next couple of years, and the stock currently trades at 20x FY15F earnings, a significant discount to the sector.

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COMMENTS

nagesh kini

6 years ago

The MNCs have squeezed the vast and fast expanding Indian middle class market.
It is high time the GOI tells the MNC cos. who have earned enough royalty over the last 25 years to call it a day effective 1.4.2014. Now there ought to be cap and fixed tenure of not more than 10 years.Enough is enough.As it is they are earning fabulous returns on their Indian investments.

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