One of the biggest advantages of the Indian equity market is the liquidity it offers. It is comforting for investors to know that they can sell shares of a company whenever they want to without any hassle. In the past, there have been instances where company-specific issues, such as huge debt, involvement in a scam and illegitimate conduct of the promoter, drove liquidity out of the company and investors found themselves holding stocks of such companies and not able to sell. However, the Securities and Exchange Board of India’s (Sebi’s) unprecedented move to tag 331 firms as shell companies and restrict trading in them takes liquidity out of these companies in one go and also closes the exit option for investors, leaving them saddled with stocks of these companies. Experts say that while retail investors have to stop acting on tips floated by manipulators in the market and instead invest in companies with strong fundamentals, good business model and credible promoters, there is also a concern that the Sebi’s directive might not be the right way to proceed.
The capital markets regulator has on several occasions warned the investors against trading on the basis of unsolicited tips received through SMSes and calls and has also advised them to deal only with Sebi-registered investment advisers and research analysts. However, many say that closing the exit option is not the right decision, as it not only hurts retail investors but also weakens broader sentiment in the market.
“The regulator’s action does not seem justified and retail investors should not be punished for investing. The regulator cannot close the exit for such investors after having given the permission to invest,” said C J George, chief executive officer, Geojit Financial Services. Experts also feel that instead of having an exit barrier, the regulator should have brought in an entry barrier so that retail investors are not influenced into investing in such companies.
While retail investors seem to have been punished as of now for investments in such companies, the head of another leading financial services firm asked if the regulator will also punish the merchant bankers for bringing out such issues in the market in the first place.
“Anyone can enter the market to raise money through their IPO (initial public offering) when the indices are rising.
Sebi should instead ask questions from the merchant bankers and auditors as to what due diligence they carried out. I think Sebi should also call the merchant bankers of these 331 companies and hold them liable,” he said.
On Tuesday, Sebi directed stock exchanges to initiate action against 331 listed firms that the Ministry of Corporate Affairs suspects are shell companies. While Sebi has directed shares of these companies to be put under the Stage-VI of Graded Surveillance Measures which is the highest stage of surveillance, shares of these companies stopped trading at the exchanges beginning Wednesday. They will be allowed for trade only on the first Monday of every month. While the companies will undergo independent and forensic audit of their financials, they will get delisted if the exchanges do not find evidence that these companies indeed exist.
While two companies J Kumar Infraprojects and Prakash Industries out of the list of 331 moved the Securities Appellate Tribunal against the Sebi direction, the Tribunal stayed trading restrictions imposed on the two companies. As a result, these shares can resume normal trading beginning Friday.