Retail investors, institutions stare at huge capital losses in 'Big 12'

Close to a million retail shareholders and some top institutions are staring at hundreds of crores in capital losses in large companies marked by the Reserve Bank of India (RBI) for insolvency process.

“Companies going into insolvency means they do not have enough assets to pay even the secured creditors. Equity investors will get nothing,” said a senior financial services executive. 

In a corporate structure, the owners or equity shareholders come last in the pecking order of payments at the time of liquidation. But, this will be a new experience for public shareholders in India as the corporate insolvency framework has taken shape here only now.

Of the 12 companies said to be in the RBI’s first list, Essar Steel and Bhushan Power & Steel are not listed. Era Infra Engineering has not been trading for nearly a year now.

According to the data compiled by BS Research Bureau, the remaining nine companies had a total retail shareholder population of 854,784  according to the latest shareholding pattern filed with the exchanges. A person holding shares worth less than Rs 2 lakh is considered a retail investor. The retail population ranged from 24,793 for Monnet Ispat to 232,638  for Lanco Infratech. Their holdings also were diverse from 7.72 per cent in Monnet to a high of 47.76 per cent in Jyoti structures.

Several institutional investors also have an exposure to these companies. Life Insurance Corporation of India (LIC), the largest institutional investor in the country, had an exposure in six of these companies — ABG Shipyard, Amtek Auto, Bhushan Steel, Jaypee Infratech, Alok Industries, and Jyoti Structures —in the range of 1-3.65 per cent.

Market experts say a significant amount of value destruction has already happened in these shares ever since the Cabinet approved the plan to use the insolvency route for large accounts. Though the names were not public, the market seemed to have a fair idea. It is possible that many smarter players including institutional holders like LIC have dumped their holdings and cut their losses during this period.

The Cabinet approved the plan on May 4. Between May 3 and June 20, the nine stocks have lost between 10 per cent and 50 per cent.  

As a result, the cumulative value of shares held by retail shareholders in these companies fell to Rs 971 crore from Rs 1,299 crore. 

Similarly, the value of LIC holding would have fallen to Rs 142 crore from Rs 181 crore before the Cabinet decision. By the time, the liquidation process is complete, the value of these shares would be zero. 

But, despite the bleak prospects, seven of these companies — Bhushan Steel, Monnet Ispat, Alok Industries , ABG Shipyard, Amtek Auto, Jaypee Infra and Electrosteel — ended with gains on Tuesday. 

Investment advisers are telling people to ignore these blips and stay away from these stocks.

Rahul Shah, vice-president, Equity Advisory group, Motilal Oswal Securities, said, “One thing is clear. There is nothing left in these companies. In that scenario, exiting is the best option. Even in the short term, one should not look to get into these companies.”

Ajay Kejriwal, president, Choice Securities, agreed. “I don’t see any value creation in these stocks. As days pass, it would only get worse. The short-term upmoves would be due to speculation, investors should not fall for that,” he said.