40% of BSE & 30% of NSE stocks haven’t been actively traded for long.
In a significant pointer to the lack of depth in domestic equity markets, the number of illiquid stocks — those that have not been actively traded for a long time — has increased sharply.
According to the Bombay Stock Exchange (BSE), out of the total 4,700 companies listed on the bourse, 40 per cent, or 1,824 companies, are illiquid counters. On the National Stock Exchange (NSE), 30 per cent, or 395, of over 1,200 companies have been classified as illiquid.
Illiquid stocks have a wide bid and ask rate difference. Even when no news is breaking and stock prices are not changing, the bid-ask difference keeps fluctuating. And, this fluctuation is spurious in nature.
The classification exercise was jointly carried out by members from BSE, NSE and the Securities and Exchange Board of India (Sebi). Following this exercise, the exchanges have asked investors to exercise additional due diligence while trading in such stocks, either on own accounts or on behalf of clients.
Sources say many more companies could find a mention on the list when it is revised next month. "If the criterion is only average volumes on the counter, then surely there are more companies to be added to the list," said a research analyst.
| TRADING INACTION Volume of shares traded on BSE | ||
| Company | Dec 4 | 2-wk avg |
| Bang Overseas | 10 | 30,985 |
| Veer Energy | 1 | 1 |
| Broadcast Initiatives | 1,710 | 1,814 |
| Hilton Metal Forging | 2,550 | 3,192 |
| Decolight Ceramics | 8,375 | 4,741 |
| Indus Filla | 400 | 4,527 |
| Source: BSE | ||
The entry of some of the recently-listed companies in the illiquid list has also raised eyebrows over the due diligence and pricing method of investment bankers, who help firms raise capital from the public. Some of the recently-listed initial public offers (IPOs) on the list are Bang Overseas, Veer Energy and Infrastructures, Broadcast Initiatives, Hilton Metal Forging, Decolight Ceramics and Indus Filla.
The share prices of these companies had risen by over 100 per cent in a few weeks after listing. However, their prices have now plunged by 40-90 per cent and investors are finding it difficult to exit from these counters as they are hitting consequent lower circuits with no buyers.
"It is really shocking to know that some of the recently-listed IPOs have been classified as illiquid. Some of them had good volumes for the first few months, but they’ve subsequently fallen. And, this has become a pattern. It is high time that Sebi considered paying the fees to IPO rating agencies from the investor protection fund lying with stock exchanges. This will ensure that bourses exercise extra caution at the time of listing, so that fly-by-night operators are prevented from raising money from the public," said the managing director of private bank involved in IPO financing business.
The illiquid list also includes stocks of Crisil, Titan, KGN Industries (the penny stock that had shot up by 100,000 per cent in a single day after it was re-listed), Gokaldas Exports, Vijay Shanti Builders, KLG Capital and Prime Focus.
"The regulator should ensure that stock exchanges tighten the listing criteria and allow only quality companies to list," said a stockbroker.
A case in point is B K Modi-promoted Spice Mobile, which was not allowed to list on NSE as the company had failed to meet the minimum net-worth criteria specified by the exchange. It was, however, allowed to list on BSE.
Apart from the 1,824 companies on the illiquid list, over 1,400 others have been suspended by BSE in the past few years on various compliance issues. However, the crux of the matter is that investors don’t have an option to exit such companies.
