 "Best to exit stocks stuck in regulatory mess")
Regulatory woes are as big a problem for investors as for companies because it is difficult to decide on investments in these firms. On the one hand is the risk of investors losing their hard-earned money if they stay put and on the other, there is a risk of not being able to benefit from a recovery if such stocks see a turnaround.
Investment experts are unanimous that individual investors shouldn't enter stocks of companies stuck in regulatory mess. But, sometimes, regulatory concerns come up later and a judgment on this comes with additional delay. A case in point is the Securities and Exchange Board of India (Sebi) announcing a final order in the DLF case six years after it took up the issue.
As all stocks run the risk of facing regulatory issues, Piyush Garg, chief investment officer of ICICI Securities, says individuals should get out of scrips at the first hint of regulatory concern. "The bigger disadvantage with stocks stuck in regulatory issues is these might not be able to give you positive returns, even if they don't give negative returns. The DLF stock has lost a lot (73 per cent since October 22, 2009, when it stood at Rs 448.75) in the past six years. And, if it isn't able to give you positive returns for the next five years, your money and time will be wasted," he says.
The DLF stock fell 28 per cent through the week following the Sebi order.
Similarly, Jindal Steel and Power, embroiled in a mining case, has fallen 50 per cent since April 2013 and 25 per cent since September this year. Financial Technologies India Ltd (FTIL) has fallen 67 per cent since July 31, 2013, when a payment crisis broke out at National Spot Exchange Ltd, promoted by it.
Before taking a decision on her/his investment, one needs to consider how much of the bad news has been factored into the stock price and whether or not the stock can give quick returns. If one looks at the stocks stuck in regulatory issues between 2013 and 2014, it is seen most haven't recorded much change in the price.
Sudhakar Ramasubramanian, managing director of Aditya Birla Money, agrees with Garg. "Individual investors should always invest in quality stocks, not those facing issues. This is because such stocks could fall sharply on any negative news and retail investors can't handle that. While one could take some risk at times, one should also ensure she/he is invested in a diversified basket of 20-30 stocks and the impact of a controversial stock is one-two per cent of the overall equity portfolio. At best, a high risk-taker could have 5-10 per cent exposure of the overall equity portfolio in stocks embroiled in hassles."
Only savvy individual investors (those who understand stock markets and the associated risks) should consider volatile stocks. On a good day, it could give them 15-20 per cent upside. That's why some recommend avoiding stocks in whose case promoter integrity has been questioned or any other type of regulatory issue(s) have even been hinted at. This should be one of the filters during stock selection.
Dhawan says individual investors should get out of stocks of companies pulled up by regulatory bodies. If they decide to remain put, it should only be because the company is seeing some movement towards a clean-up act.
Another way to decide is to consider the severity of the case slapped on an entity, says Shriram Subramanian, founder of InGovern Research. This is because there are risks for companies such as Infosys Technologies in case of an issue pertaining to the US' immigration department, or a risk to UB Group chief Vijay Mallya's businesses if he is declared a wilful defaulter.
One has to evaluate the impact of a case on a company's reputation and operations, Subramanian says. For instance, in GSK Plc's case, the regulator acknowledged the company didn't receive any "quantifiable gain or unfair advantage" due to the delay in disclosing changes in the shareholding structure of its India-listed unit, though it imposed a penalty. There could be similar technical issues, pertaining to taxation or tax returns, in which case investors need not panic.
In DLF's case, the company won't be able to raise funds for retiring debt. Also, it might not be able to participate in real estate trusts. But there won't be any impact on its operations.
At the same time, as there are better stocks in the market, one might want to exit DLF. Also, the company's projects are concentrated in a particular region.
Similarly, the US immigration concern won't be much of a concern for Infosys, as the company is sitting on cash piles. But if the immigration department puts a restriction on the number of employees to be allowed into that country, the company's operations will be impacted, says Subramanian.
Investment experts are unanimous that individual investors shouldn't enter stocks of companies stuck in regulatory mess. But, sometimes, regulatory concerns come up later and a judgment on this comes with additional delay. A case in point is the Securities and Exchange Board of India (Sebi) announcing a final order in the DLF case six years after it took up the issue.
As all stocks run the risk of facing regulatory issues, Piyush Garg, chief investment officer of ICICI Securities, says individuals should get out of scrips at the first hint of regulatory concern. "The bigger disadvantage with stocks stuck in regulatory issues is these might not be able to give you positive returns, even if they don't give negative returns. The DLF stock has lost a lot (73 per cent since October 22, 2009, when it stood at Rs 448.75) in the past six years. And, if it isn't able to give you positive returns for the next five years, your money and time will be wasted," he says.
The DLF stock fell 28 per cent through the week following the Sebi order.
Similarly, Jindal Steel and Power, embroiled in a mining case, has fallen 50 per cent since April 2013 and 25 per cent since September this year. Financial Technologies India Ltd (FTIL) has fallen 67 per cent since July 31, 2013, when a payment crisis broke out at National Spot Exchange Ltd, promoted by it.
Before taking a decision on her/his investment, one needs to consider how much of the bad news has been factored into the stock price and whether or not the stock can give quick returns. If one looks at the stocks stuck in regulatory issues between 2013 and 2014, it is seen most haven't recorded much change in the price.
Sudhakar Ramasubramanian, managing director of Aditya Birla Money, agrees with Garg. "Individual investors should always invest in quality stocks, not those facing issues. This is because such stocks could fall sharply on any negative news and retail investors can't handle that. While one could take some risk at times, one should also ensure she/he is invested in a diversified basket of 20-30 stocks and the impact of a controversial stock is one-two per cent of the overall equity portfolio. At best, a high risk-taker could have 5-10 per cent exposure of the overall equity portfolio in stocks embroiled in hassles."
| HOSE WHO GOT PULLED UP |
|
Only savvy individual investors (those who understand stock markets and the associated risks) should consider volatile stocks. On a good day, it could give them 15-20 per cent upside. That's why some recommend avoiding stocks in whose case promoter integrity has been questioned or any other type of regulatory issue(s) have even been hinted at. This should be one of the filters during stock selection.
Dhawan says individual investors should get out of stocks of companies pulled up by regulatory bodies. If they decide to remain put, it should only be because the company is seeing some movement towards a clean-up act.
Another way to decide is to consider the severity of the case slapped on an entity, says Shriram Subramanian, founder of InGovern Research. This is because there are risks for companies such as Infosys Technologies in case of an issue pertaining to the US' immigration department, or a risk to UB Group chief Vijay Mallya's businesses if he is declared a wilful defaulter.
One has to evaluate the impact of a case on a company's reputation and operations, Subramanian says. For instance, in GSK Plc's case, the regulator acknowledged the company didn't receive any "quantifiable gain or unfair advantage" due to the delay in disclosing changes in the shareholding structure of its India-listed unit, though it imposed a penalty. There could be similar technical issues, pertaining to taxation or tax returns, in which case investors need not panic.
In DLF's case, the company won't be able to raise funds for retiring debt. Also, it might not be able to participate in real estate trusts. But there won't be any impact on its operations.
At the same time, as there are better stocks in the market, one might want to exit DLF. Also, the company's projects are concentrated in a particular region.
Similarly, the US immigration concern won't be much of a concern for Infosys, as the company is sitting on cash piles. But if the immigration department puts a restriction on the number of employees to be allowed into that country, the company's operations will be impacted, says Subramanian.