Jet, set, going down

Two market mavens were having a delightful chat on Twitter recently: “Can someone educate me on why Jet Airways is still listed and trading, and how does it go up 5 per cent daily when the airline has closed down?” Another responded: “Absolutely. Air India can merge with Jet airways and become even more valuable on this account.”
 
This was friendly banter but it does raise some uncomfortable questions. The Jet Airways stock has gone up from Rs 15.45 in October 2019 to Rs 50 in January 2020 — up over 300 per cent in three months even though the company has been grounded for over a year. It hit the upper circuit of 5 per cent consistently almost every day in the past month (a Z-category stock’s upper and lower circuit filters are fixed at 5 per cent). And after hitting the lower circuit for the last few trading sessions, on Tuesday, the stock started moving up again.  Clearly, speculators are happily playing the “pump and dump” game.

 
So what are the regulations governing such stocks? One of the main criteria for suspending a stock from trading is the failure to report earnings for two consecutive quarters — a rule that both the Bombay Stock Exchange and the National Stock Exchange have followed diligently, the most recent cases being Café Coffee Day and the fraud-hit CG Power. Both did not declare results in the July and September quarters. (They have time till today, January 29, to comply, failing which trading will be suspended from February 3.) 
 

Then why is Jet Airways special since it declared its last quarterly result in December-end 2018? Perhaps because of the hope factor, since it is in the Insolvency and Bankruptcy Court (IBC). The benevolence of the exchanges might have also stemmed from the fact that the company has a few planes, valuable airport slots and other holdings that may still fetch a buyer. There could also be a moral hazard of depriving as many as 150,000 investors an exit route. Meanwhile, there is some minor fees to be earned from the daily transactions. So, while their indecision may be understandable, speculators are having a field day.

 
Reality check: Even if Jet Airways is bought in the IBC process, there is no guarantee that investors will get the existing stock price, or even close to it, or anything for that matter. The Securities and Exchange Board of India’s (Sebi) July 2018 circular has clearly given acquirers the flexibility, including exemption from any reverse book building and the requirement for minority shareholders’ approval. This exemption means that the next owner is under no obligation to pay the existing shareholders any price for their holdings. In the case of Electrosteel Steels, the Vedanta Group gave 19 paise per share whereas it was trading at Rs 26. Essar Steel shareholders’ holdings were simply extinguished after ArcelorMittal took over.

 
History has been equally unkind to shareholders of other badly-run companies. In 2004, Oriental Bank of Commerce paid nothing to shareholders of Global Trust Bank though depositor money was protected.
 
Since the Sebi is already clear in its stand, tightening the screws further on such companies’ shares would be a step forward. Guidelines like putting the stock into the trade-to-trade category — a type of settlement system where transactions can be done only for delivery — immediately, will deter speculators. It will also prevent circular trading as brokers have to pay for each transaction (buy or sell). And only genuine investors will be able to participate in the trade. Other steps like advanced monitoring, and of course, a higher trading margin should be imposed.

 
According to its own investigations, the Sebi had identified 331 companies a couple of years back that it assessed were misusing the stock exchange platform for tax evasion, incidentally called “stocks for tax planning” in the stock market parlance. These entities were availing of long-term capital gains (LTCG) through sham transactions. Thankfully, these may have come down after the imposition of the 10 per cent LTCG in the last Budget, say market players.
 
Some believe that the regulator should not intervene, but only investigate, for now.
 
They argue that it has the option of punishing traders in case of circular trading, or any other wrongdoing. But given that such investigations take a long time and waste manpower, a stronger rule seems to be the need of the hour. Prevention is better than cure.

 
Of course, speculation needs to be the heart and soul of the stock market. But as American investment guru Philip Fisher has said: “The stock market is filled with individuals who know the price of everything, but the value of nothing.”
 
Jet Airways needs to be taken out of this misery. Even Naresh Goyal would agree.