Investors avoid stocks outside A group over regulatory tightening

Regulatory tightening and concerns over governance have put companies that fall outside the so-called ‘A group’ in a tough spot. Stocks in the A group now account for nearly 93 per cent of the country’s total market capitalisation (m-cap). Those in the B group account for less than 5 per cent, while all the remaining categories represent just 1 per cent.

The dominance of A group stocks has been consistently rising since two decades. In 2001, they accounted for 74 per cent of the total m-cap, while in 2011 the same increased to 85 per cent.

The BSE puts stocks in various buckets depending on their size, trading activity, and compliance scorecard. Stocks in the A group are those that are regularly traded, have sufficient public float, and meet other norms prescribed by the exchanges.

This category has 479 stocks at present, considered highly liquid. Other categories include T, X, and XT, depending on the curbs imposed. Stocks that don’t fall in either A or other categories, are tagged as B group stocks. These are typically small-cap companies.

Market players say investor interest in non-A group scrips has waned, on account of consistent regulatory tightening. 

“There is a general lack of interest in non-A group stocks due to governance issues and trading curbs. For example, once a stock is put in the trade-to-trade mechanism, an investor cannot exit even if there is significant fluctuation in the price before delivery. Further, the margin required to deal in these stocks is often high,” said Kamlesh Shroff, chairman of Anmi, a broker’s association. 

Exchanges and market regulators have introduced the concept of graded surveillance measures (GSM) for stocks that see lot of speculative activity. Experts say stocks put under GSM see little interest from genuine investors. 

The rationale behind the GSM is to ensure market integrity and safety of investors. Experts say regulators should device a new way to address this issue, given these curbs have made dealing in many securities costly.

"We are making the Indian markets as the most expensive, as far as the cost of transaction is concerned,” said Deven Choksey, managing director of KR Choksey Securities. “The method under which the regulator is managing risk is inappropriate. Asking brokers to get into clearance and custodial activity of clients is becoming counter-productive. Instead of levying hefty margins and imposing a surveillance mechanism, the ideal way to go forward would be the custodial way of settlement," he added. 

Market players said challenges to the price discovery process, too, could be driving investors away from stocks not in the A group. This is making the stock market a hostile ground for smaller firms.

“Earlier, large investors used to find hidden gems in the broader market. However, misuse of the stock exchange platform has given a bad name to companies that don’t belong to the A group. In the long run, therefore, it could impact the stock market ecosystem as there will be concentration in only a few hundred stocks,” said a broker.