It seems to be another case of shutting the stable after the horses have bolted. Though stock exchanges claim they have taken timely action to prevent price manipulation in small-cap stocks (or penny stocks), prices of these dud stocks were going up on a daily basis despite various surveillance actions taken by the stock exchanges.Stocks of at least 300 companies listed on the Bombay Stock Exchange (BSE) shot up between 500-7,000 per cent in the last 12 months. This is despite the fact that over 1,000 companies are categorised in the T and Z groups, where deals are done on trade-to-trade basis (resulting in compuslory delivery of shares). BSE claims it reshuffled the scrips in the T-to-T segment on the basis of abnormal price movement but stocks continued to rise despite curbs. If the BSE has timely action, whid did the prices of so-called penny stocks rise to ridiculous levels?‘‘The BSE measures were ineffective. Over 6,000 companies are listed on the BSE. Nearly half of these are dud stocks. the result of past mistakes. These stocks have no reason to be listed on the stock exchanges,’’ said a leading BSE dealer. Many of these companies — listed during the 1994-98 public issue boom — categorised in the T and Z groups are shady firms with no operations or projects. When contacted, a BSE official said in an email reply: ‘‘BSE on a pro-active basis has been taking various surveillance actions/measures on the scrips where abnormal trading pattern has been observed on an ongoing basis.’’However, take for example Sunshield Chemicals. The company — which made losses in 2004-05 — shot up from around Re 1 to Rs 78.25 by September 16. Though this stock is in the T group, the scrip continued to rise in trade-to-trade deals. When BSE took a series of measures early this week, the stock plunged by nearly 15 per cent to Rs 66.50 by Friday. There are several other companies like Sunshield.The exchanges tightened the surveillance only when the Sensex hit the 8,500 level and a host of media reports made investors nervous. Both BSE and the NSE took a series of measures like cut in circuit filter cap and higher margins earlier this week when the markets became overheated and the Sensex hit the 8,500 level. Sebi also started investigating the abnormal rise in the prices of 50 companies. Result: The BSE Small Cap Index plunged by 11.3 per cent on last Wednesday and Thursday.According to BSE, one of the measures taken by the exchange to curb excessive speculation is transfer of scrips in ‘T’ group (Trade-To-Trade segment), wherein all the trades in the scrips under the group have to be settled by delivery. ‘‘Additionally, the trading platform of the exchange also displays a warning message at the time of order entry itself informing the investors about the status of these scrips. Circuit filter reduction has been made applicable on 9,083 scrips since January 2005,’’ BSE claimed.BSE also imposed position limits at the trading member level for dealing in a scrip of ‘Z’ group as well as cumulative for all scrips in ‘Z’ group. It had levied 100 per cent margin on scrips, which are under trade-to-trade segment and ‘Z’ group with effect from August 8, 2005. ‘‘The exchange releases advertisements in the leading newspapers and magazines from time to time detailing an exhaustive list of Dos and Don’ts for the benefit of the investing public,’’ it said.Even after taking these measures, prices of penny stocks soared through the roof, leading to an investigation into 50 odd penny stocks by Sebi. Fund managers — who have seen investors losing money in the 1992 and 2000 boom periods — feel BSE should have increased margins and put more curbs.According to Finance Minister P. Chidambaram, the market was trading in comfortable PE limits. But fund managers say this argument willwork only in the case of blue chip stocks. It’s not a reflection of what is happening in the backyard of Dalal Street where penny stocks like Anantraj and Galaxy showed a PE of of 627 and 483, respectively while others showed nil PEs (no profits).‘‘There can be promoter-broker nexus operating in the market that pushed up prices of some of these stocks by 100-3,000 per cent in the last 12 months. Every bull run results in unscrupulous promoters taking advantage and manipulating the stock prices by organised trading, false ads, manipulating results, stock splits, etc,’’ said Kirit Somaiya, president of Investors Grievances Forum (IGF). IGF has submitted a list of 1,138 small stocks which shot up 100-3,000 per cent in the last 12 months to the Finance Ministry.Thanks to the hype surrounding the Sensex rise, small investors were getting attracted towards these penny stocks. Some of them are already trapped in such stocks as prices have crashed in the last three days.
