Penny stocks: Is the rise real?

Jindal Vijaynagar was quoting at Rs 3 till a couple of months ago. Now the stock has shot up by over 560 per cent to Rs 20. Vyapar Indust was quoting at just Rs 2 a few months ago but now the stock costs Rs 26.80. This is a whopping gain of 1,240 per cent in a few months’ time. Similarly Keltech Eng has shot up from Rs 6 to Rs 30. Bombay Talk has surged by 413 per cent from Rs 1.12 to Rs 5.75 in a month’s time.

“Companies listed in the B2 and Z groups of the BSE are being targeted by manipulators. Most of these are small and unknown… and rarely in the news,” said stock dealer R. A. Podar.

Unmistakable signs of investors getting trapped in such penny stocks are again visible. While large-cap stocks are being flooded with foreign institutional investor money, retail investors have started flocking to penny stocks once again.

“With the markets in a bull grip, large cap stocks have gone out of reach of retail investors. While some of the big-cap companies actually have a restructuring story in their favour, many of the penny stocks are just moving up without a fundamental reason,” said a fund manager.

The modus operandi being adopted by manipulators is same: They will identify a thinly-traded and low-priced share. “They will put buy orders at the circuit-breaker limit of 20 per cent or 10 per cent. This will continue for a number of days. Simultaneously they will float rumours suggesting that there’s a turnaround in the company or it bagged a huge order or they talk about a big expansion plan. Retail investors will be lured into the stock. They normally run after the stock after the share price goes up by 200 or 500 per cent. The rest is history. Riggers who are hand-in-glove with promoters dump all their holdings to retail investors at these high levels and prices will crash later,” says a market source. It’s a question of the change in the market sentiment. Till three months, nobody — not even manipulators — was looking at such stocks. The 1,000-point rally in Sensex to the 4,000 level in the last three months was what riggers were looking for a fast buck.

Nearly 2,800 companies out of 5,651 companies listed on the BSE are not available for trading as these companies were suspended by the exchange for many reasons like failure to publish financial results, non-payment of listing fees etc. Otherwise, the number of stocks available for manipulation would have increased. “Even now most of the Z group and B2 group stocks on the BSE have no projects worth mentioning. Some of them are only paper companies,” a former BSE official admitted.’

Though the Sebi has warned operators against rigging penny stocks, the manipulation is continuing on the back of the sustained rise in Sensex. The total number of stocks traded on the BSE has risen to close to 2,200, out of which 1,200 belong to ‘B1’ and ‘B2’ groups. The number of stocks traded from the ‘Z’ group has crossed 50.

Stock market pundits also admit that it was a mistake to allow such companies to come up and list on the exchanges. There should have been tougher entry norms to avoid the existence of dud companies.

And the market will have to correct these prices at one stage. The message for retail investors is loud and clear: keep away from this manipulation. Don’t get trapped in this rigging exercise.