The recent fall in the equity markets has brought into sharp focus penny "" or, disparagingly, 'kachra' "" scrips. |
Analysts are questioning their huge surge and the role of operators in propping up the prices. |
A fund manager with a domestic mutual fund puts the role of operators succinctly: "Most companies have seen a surge in prices because of fundamental reasons, helped by the valuations story but many counters have seen a huge run up in prices for no 'apparent reason'." |
Between end-December 2003 and end-December 2004, penny stocks - scrips that usually trade below their par values - have beaten the Sensex hollow. |
The market capitalisation of these stocks has surged 85 per cent during the year while the benchmark BSE Sensex has only risen by 13 per cent. Even the broader BSE 500 index has gone up by only 17 per cent during the same period. |
And this punting is not limited to only the penny counters; many small cap and mid-cap companies with no obvious intrinsic value have ridden the rally over the last one year. |
Some penny ('kachra') scrips back have surged in the range of 1500-2000 per cent and more, which means they could have an even harder fall when stock manipulators decide to dump them. |
Jitendra Panda, vice-president at Motilal Oswal Securities, said, "Most penny counters and 'rogue' scrips run by operators have seen a huge surge but these counters will also be the worst hit when the market falls. That is when the small investor, who typically buys these types of shares, will be hit. He will run from pillar to post abusing the equity market." |
Rajesh Kamdar, a dealer at KG Vora Securities, added, "A lot of investors want to be part of the rally. But they can't buy high-value frontline scrips and hence get into lower-value counters. Some of them end up buying bad companies without realising it." |
Records also show that a huge number of small companies got themselves relisted in the last one year to take advantage of a booming market. |
Since January 2004, more than 200 companies have got themselves re-listed. Most of these stocks were delisted by the exchange for non-compliance with various clauses of the listing agreement. A few of them failed to submit their quarterly results, and some failed to declare their book-closure dates. |
Among the companies that were relisted after a long gap were ACE India, Bijlee Trading, Sainik Finance, NEPC India and Ranjit Securities - all of them got themselves relisted on the BSE after a gap of two years. Pasupati Fabrics and Gujarat Organic have got themselves relisted on the BSE after a gap of nine years. |
They were last traded in 1995. Pioneer Distilleries, Sunline Tubes and Bihar Sponge Iron have relisted after eight years, while Vikram Thermo, International Conveyors, Laser Dot and Jayavant Production have relisted after seven years. |
Karur KCP Packaging, Sunrise Investment, Living Room Lifestyle and Sinhal Holdings have returned after five years and Osian LPG Bottling, Kamanwala Industries, Ventura Textile, Orind Exports, New Bombay Print and Ramsons Projects are back on the BSE after four years. |
Most of these companies are from the B and Z groups. The spurt in valuations of mid-cap stocks has also led to an increase in the average number of B and Z group stocks traded on the BSE. |
Market players suspect that there could be a promoter-broker nexus involved in pushing up penny stocks with the latter enticing retail investors with excellent 'buy' reports. The regulator keeps a tab on trading activity, but many brokers are smart enough to evade notice. |
Exchange officials say they also keep a wary eye on unnatural movements in scrips, but the sheer number of penny stocks makes surveillance tough. |
The broker-promoter nexus is alleged to work something like this. It starts with the promoter giving the broker a tip that his company may be about to receive a big order or some other positive news, following which the broker picks up a large chunk of stock. This sudden buying activity is enough to raise the price of a Rs 2 stock to Rs 4 or Rs 6. |
This story is then passed around to other members of a broker coterie, and the collective buying interest raises both volumes and prices - making the rally appear genuine. |
As brokers start passing the good news around to clients, retail investors start getting into the act, and soon enough "genuine" retail interest pushes the shares up further. |
At this point, the promoters and brokers start disinvesting, steadily sending the shares back downwards. The promoters make a killing by selling high and buying back the shares when the share hits bottom once again. |