Illiquid stocks on the rise

More scrips in the list now than before election results

There are some stocks in Indian markets which see so little activity that they have to be traded in a separate segment. The list of such illiquid stocks is now longer than it was before last year's election results, despite the market hitting new highs.

There were 408 such stocks before the Narendra Modi government came to power. This fell to 273 after the government was formed in the May 2014. There has been a steady rise in numbers since then. The number for the latest quarter number is higher than the pre-election figure at 413.

A stock is declared illiquid if it has an average daily turnover of less than Rs 2 lakh. There are exclusions for factors such as companies whose market capitalisation is more than Rs 10 crore and which has paid dividends in two out of the previous three quarters. These are then traded in a separate auction segment for 2 hours a day with certain restrictions, such as limits on price movement.

A combination of exiting retail investors, low floating stock and a tendency to avoid dodgy names has resulted in more companies joining this list.

"In the April-June quarter last year there was a pickup in investor participation on account of the election results. But many of the investors are people who have been holding stocks for some time, and are using this opportunity after a five-year bear run to exit certain counters. Fresh retail buying through the direct route has come down. This June quarter was one of the worst, post election, because of the volatility during the period," said E Prasanth Prabhakaran, president (broking), IIFL.

"Investors have been looking for names that have not been discovered yet. But once these come to light, large investors corner shares, making such counters relatively illiquid. Investors who are aware of the earning potential of such stocks are willing to hold on for two-three years," said Ravi Shenoy, AVP (Midcaps Research), Motilal Oswal Securities.

Smaller stocks also have lower public shareholding, which makes them more illiquid if shares are cornered. The midcap and smallcap indices have public shareholding of 42.25 per cent and 40.78 per cent, respectively, compared to 52.91 per cent for the Sensex.

The number of illiquid stocks fell from 458 in December 2013 to 408 at the end of March 2014. This fell further to 273 after the election in which the Bharatiya Janata Party managed to secure India's first single-party parliamentary majority in three decades. However, the euphoria seems to have worn off after the June quarter. The number of illiquid stocks rose to 388 in September, and climbed steadily to reach over 400 in June. There was only one brief decline from 388 in September to 363 in the subsequent quarter. It increased to 395 by March. By June, it had crossed its pre-election number.

The number has been on the rise even as the midcap and smallcap indices have shown a rising trend. Both hit all-time highs in August. The upside may be driven by select names that investors are comfortable investing in for the long-term while avoiding less favourable stocks at the bottom of the pile, according to experts.

"Market participants are getting choosier. Many investors have burnt their fingers earlier and are wiser," said Alok C Churiwala, managing director at Churiwala Securities and vice-chairman of the Broker's Forum.

Cash market volumes were Rs 17,842.23 crore in June, the lowest in this financial year, according to exchange data. "One will have to wait for results to pick up in a couple of quarters before the trend changes," said Prabhakaran of IIFL.