How to steer clear of stocks that do the vanishing act
Small-cap stocks with weak fundamentals and no institutional holding are more susceptible to suspension.
If you are among those passive investors who review their portfolios once in two or three years, chances are high that one day you would be found wondering how to sell stocks such as NEPC Agro or Jord Engineers or Sanghi Polyester that are part of your holding. These stocks have disappeared from stock exchanges and investor radar.
It is not just these stocks that have done the vanishing act. The Bombay Stock Exchange sports a list of around 1,700 stocks that have been de-listed and another 1,220 that have been suspended from trading.
Investors in shares that are de-listed have it relatively easy. In voluntary delisting, the promoter offers to buy back shares from the public due to various reasons, including merger of companies, public holding falling below prescribed limits or because the promoter wishes to own the entire stake. When the company is liquidated, the shares are compulsorily de-listed from exchanges.
Such closure is not available in suspended stocks. When shares of a company are suspended from trading, it remains a possibility that the company could comply with exchange regulations and re-list. Investors continuing to hold such shares are left with no exit route when the company decides to forego listing and move away from public glare.
The rules
Companies have to make periodic disclosure to exchanges on their financial statements, shareholding pattern, trading in company's shares by insiders, adhering to corporate governance practices and so on as part of the listing agreement signed with exchanges. When companies fail or are late in making these disclosures, they could land in trouble.
The Bombay Stock Exchange stops trading in shares of companies which do not make the above disclosures. For instance, companies that do not submit quarterly financial results in two consecutive quarters or are late in the submission in two of the previous four quarters will invite penal action in the form of suspension.
The rules followed by the National Stock Exchange are slightly different. Non-compliant companies are served show-cause notice by the exchange. Based on the response, a committee decides whether the shares of the company need to be suspended or not.
Suspension can be revoked once the companies follow the requirements of the listing agreement for a specified period. BSE additionally requires that the promoter holding should be locked in for a year from the date of revocation, the company should have signed a demat agreement with at least one depository participant and it should have its own Web site.
Trends
It is, however, obvious from a quick perusal of the list put out by the BSE and NSE that companies are using the suspension route to disappear. The Bombay Stock Exchange Web site lists around 1,220 stocks in which trading has been halted due to penal reasons since 1995. The list on NSE contains 155 companies, with few companies featuring in both lists.
Suspension of companies has accelerated after the dotcom bubble of 2000. Between 2000 and 2005, BSE suspended 983 companies while NSE suspended 102 companies. This accounts for 81 and 67 per cent of total suspension list on BSE and NSE, respectively.
While suspensions were seen tapering off since 2005, there is a spike in the first nine months of 2012. The number of companies suspended from trading in this period is double the number reported for entire 2011 on both the exchanges.
Analysing the profile of the suspended companies, three trends emerge.
Some sectors account for a disproportionate share of the suspended companies. Companies in sectors that have been in extended business down-cycle have, in some cases, turned loss-making, and slip up in making regular filings with the exchanges. This leads to eventual exit from stock exchanges too. Textiles and apparels reported the maximum number of suspended companies as this sector, hit by both excess supply and rising input costs, has been in a slump for over a decade now.
Stocks such as Akai Impex, Salem Textiles and Arihant Cotsyn that were once trading favourites now feature in the suspended companies list. The same applies for the chemical industry that reported 50 suspended companies, including S M Dyechem and J F Laboratories.
Many small and medium enterprises in industries requiring lower capital outlay that raised funds through stock markets were unable to withstand the vagaries of business and economic cycles. With deteriorating financial conditions, many such companies also stopped complying with exchange requirements that then led to their suspension. Companies in sectors such as food packaging, auto ancillaries and edible oils are cases in point.
Last, some sectors emerge as the 'theme' of the moment with investors buying stocks in the sector regardless of the fundamentals, promoter credentials and so on. Investors willing to buy Internet companies at astronomic valuations at the turn of the century, or running after infrastructure companies post-2005 are examples of such irrationality. Who can forget yesteryear darlings such as Silverline Technologies, Pentagon Global or DSQ Software?
Guide-posts
The market regulator is unable to find a viable solution to return investor funds locked in such suspended companies. Suggestions range from making the promoter buy back these shares and de-list to exchanges using the investor protection fund to recompense investors.
While not much can be done if you are already holding stocks in these companies, it is imperative to steer clear of these companies in future. What are the guideposts that investors can watch out for? We analysed the stocks suspended by BSE in 2012 to identify a few signals.
The stock price of the company is the first giveaway. The range between which these stocks traded was Re 0.17 and Rs 58. Eight out of every ten stocks suspended traded at less than Rs 10. That is, most of these stocks fall in the penny stock category (if we define penny stocks as those that trade at values less than Rs 10. Fifteen per cent of the stocks were priced at less than Re 1.
Almost all companies suspended by BSE this year belonged to the small-cap segment, with market capitalisation of less than Rs 50 crore. Almost 70 per cent of these companies had market capitalisation less than Rs 10 crore with many having market cap of even less than a crore.
Barring a few exceptions, institutional holding, both domestic and foreign, in these stocks is absent. It is, of course, obvious that the small market capitalisation, low liquidity and deteriorating finances would keep these large investors away thus increasing the impact cost on these counters.
A quick scan of the companies' financial statements would definitely flash red for risk-averse investors. These companies had depleted reserves of less that a crore or even negative reserves. Over three-fourth of the companies had less than a crore in cash in their books. Half the companies reported revenue of less that Rs 10 crore and a third of the companies reported operating losses.
If you are among the brave-hearts who would want to dabble with these high-risk stocks with the intention of making a killing at some date, you need to scan the exchange announcements at least once every week. The exchanges put out notices of companies due for suspension in advance so that investors can exit these stocks.
Also keep scanning SEBI announcements regarding companies the regulator is investigating for trading violations. Such companies are also likely to get suspended, if found guilty. Beware of IPOs with low credit rating because many of these suspended companies stem from IPOs with doubtful credentials.
IAC should go beyond corruption
Having formed a political party, Kejriwal and Co will have to take positions on a lot of issues, in the process losing friends and making enemies. — Ramesh Sharma
Gandhiji's vision went way beyond ridding India of British rule. He had an elaborate socio-economic plan. Do Arvind Kejriwal and his team have a broader programme in mind?
October 19, 2012:
For the first time in nearly a hundred years, the middle class of India is on the move. Almost a hundred years ago, a certain Mr Gandhi appeared in India from South Africa. Within a few years, he had become known as the Mahatma.
Now, we have Arvind Kejriwal, who is possibly even more ardent. The two were about the same age when they appeared on the political scene. Mahatma Gandhi had Gopal Krishna Gokhale as his advisor and Anna Hazare has probably launched Kejriwal in a like manner. Gandhiji wrote passionately; Kejriwal speaks passionately.
The similarities seem to end there. Mahatma Gandhi fought the British rule in India, but not the British themselves. The British were not as corrupt as the Indian politicians are these days. Nevertheless, the difference is stark and marked: Mahatma Gandhi and his colleagues such as Nehru had great admiration for the British and accorded them much respect.
Apparently, Kejriwal has nothing but contempt for his enemies. It must be said, sorrowfully and truthfully, that Kejriwal and his associates are right when they say their enemies deserve no respect. However, that is beside the point; the fact remains that unlike Mahatma Gandhi's Congress Party, Kejriwal's India Against Corruption has identified a different characteristic in the enemy.
Our politicians are indeed venal and intolerably corrupt. However, they have also done some good. In the 65 years since Independence, poverty has decidedly come down and so have social distances. Many more people are getting educated — badly no doubt, but yet educated. Kejriwal himself is a beneficiary of the government's education programme and so are his friends. India has fought several wars quite creditably, except once exactly fifty years ago. They have kept the nation together, unlike our belligerent neighbour, Pakistan. Those are not unworthy achievements.
Our politicians may or may not deserve much credit for the event, yet, it must be admitted that India's technology too has improved considerably.
If you doubt it, at the time of Independence, India imported even lavatory cisterns and manholes. Now we export pretty complicated software and even cars.
SINGLE-POINT AGENDA
Mahatma Gandhi had a double agenda: One, a political agenda to fight for Independence from alien rule and two, an economic agenda to fight that war. He said, quite sensibly too, why export cotton and import mill-made cloth. He also had an education programme to educate the masses. He wanted women to be relieved of their traditional shackles. He fought for — though the community no longer admits it — the emancipation of the untouchables. Thus, he had several arrows in his quiver — social, economic ones in addition to the political ones.
In contrast, Kejriwal appears to have only one kind of bullet in his powerful gun — anti-corruption. Undoubtedly that is important and has become crucial in our unfortunate times.
Unfortunately, we do not know what his economic policies are, or what his social agenda is. Hence, the question arises as to whether his programme is sustainable or not. Suppose he succeeds — we all wish that he does — then, what next?
Even Gandhiji's economic and political scheme was unceremoniously rejected by Nehru. It was a good weapon to fight the British but not considered a stable enough pillar to build a modern economy.
I would like to recall an incident about which I have written earlier. It must have been late July or early August of 1947.
Those days, the bridge across the Buckingham Canal in front of Central station in Madras was a narrow one with a really narrow footpath. I do not remember what I was thinking when suddenly an elderly gentleman with an excellently trimmed beard and who was evidently a Muslim suddenly told me: "Smile, young man, smile!"
A few minutes later I entered a bus and there he was, and virtually the only vacant seat was next to him. So I sat there while he bemoaned the Partition of the country and Jinnah committing a serious error. I could not help telling him that he must have courage to speak openly against the Muslim leader.
That gentleman must have gone to his heaven long years ago but his words still ring in my ears. He said: "Young man, the important thing is not to have any opinion against any one or any idea; it is to be for something."
He was correct. Kejriwal is against corruption just as Mahatma Gandhi was against British rule. Yet, Gandhiji was in favour of a reformed society; what is Kejriwal in favour of?
Positive approach
Sooner or later, he will be asked what actually he is in favour of. Is he for or against nuclear power? Does he favour FDI or does he oppose it? Does he favour reservation based on caste or is he against it? Is he in favour of high-rise apartments or is he opposed to them?
Does he favour Karnataka or does he prefer Tamil Nadu's stance in the Cauvery dispute? These and many other such questions will be asked and he cannot reply 'yes' or 'no' without losing friends and making enemies, more potent because that will be members of the general public.
The name of the Party — India Against Corruption — holds it back. I wish Kejriwal had chosen a more positive name like, for instance, Party for Good Governance. A negative agenda creates needless enemies, however valid the complaint may be.
Kejriwal does not seem to have a winnable idea for creating a new political party. I suggest that he tries an appreciative enquiry — Discover what we are doing well; Dream where we want to go; Design how to get there and then Deliver that Dream in the real world. That will probably make him a new Mahatma!
(This is 340th in the Vision 2020 series. The previous article appeared on October 6.)
FDI will not bring foreign technology: Govindacharya
Rajkot, Oct 20:
Terming the union government's policy on foreign direct investment as "destructive for the country", former BJP ideologue K N Govindacharya on Saturday said it would only bring foreign capital but not the technology, and was "unwanted".
"I believe that union government's policy to allow foreign direct investment in retail business is destructive for the country, because it won't bring technology... only foreign money will be invested in Indian markets," Govindacharya said, talking to reporters here today.
Terming his visit to poll-bound Gujarat as non-political, Govindacharya said he had no interest in the active politics.
"I have no interest in active politics as I have been working to initiate creative and agitational programmes since 2003 to reform politics in India," he said.
"Democracy in India is in danger, as political parties have lost their ethical moorings and have nexus in various scams," he said, adding that Indian democracy had now become "corporato-cracy".
The battle against corruption could not be won without empowering the Election Commission further, he said.
He also said that electronic voting machines were not tamper-proof, and ballot paper was a better option. Japan, where the EVMs are manufactured, does not use them, he claimed.
Talking about Anna Hazare, Arvind Kejriwal and Baba Ramdev, he praised their movement against corruption and black money.
Pranab was mulling issue of monetising gold: Gurumurthy
New Delhi, Oct 20:
The issue of monetising gold was being considered by the then Finance Minister Pranab Mukherjee before the last budget session of Parliament but he apparently gave up the idea due to the Anna Hazare Movement, economist and RSS ideologue S Gurumurthy claimed here on Saturday.
Speaking at a programme organised by the BJP here, Gurumurthy said that "as Finance Minister, Pranab Mukherjee had called me for a discussion on monetising gold. From 1992 onwards I have been dealing with ways of monetising gold."
The former CA and journalist has a paper on the issue to his credit.
Gurumurthy said an estimated 3,800 to 6,000 tonnes of non-ornamented gold is present in the country which can be deposited with the RBI.
"But I had suggested that for this to work, tax exemption is a must," Gurumurthy said.
He indicated that while Mukherjee appeared to concur with his views, he apparently did not go ahead as the issues of black money and the Lokpal were being flagged by Anna Hazare and his team at that time.
The issue of monetising gold may have created a flutter at that juncture.
"I am told the Prime Minister's Advisory Council is taking it up seriously though I do not know what will come of it," Gurumurthy said.
SEBI can take action against Sahara for not sharing investor details: SC
New Delhi, Oct 19:
The Supreme Court today made it clear that the market regulator SEBI can take action against Sahara Group for non-compliance of its directions relating to the refund of Rs 24,000 crore raised from investors through optionally fully convertible debentures.
A Bench comprising Justices K.S. Radhakrishnan and J.S. Khehar said that SEBI has the duty to take action according to law for non-compliance of its order.
The market regulator has moved an application alleging that Sahara Group was not complying with the apex court's August 31 directions in which it was also said that the company would provide all information and documents relating to the investors within 10 days.
The Bench declined oral plea and submissions of Sahara seeking extension of time for providing the documents saying for that there was a need for an application containing written submissions.
On August 31, the apex court had directed two Sahara group companies—Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC)—to refund the amount that they had raised.
The court had said that SEBI can attach properties and freeze bank accounts of the companies, if they fail to refund the amount.
It had further directed Sahara to furnish all documents in their custody to the regulator within 10 days. The court had also appointed one of its retired judges Justice B.N. Aggarwal to oversee the action taken by SEBI.
Why link Aadhaar with service delivery if it's voluntary'
New Delhi, Oct 20:
Certain civil society members have questioned the linking of service delivery with Aadhaar, saying that the biometric unique identity number is supposed to be 'voluntary', according to the UIDAI Web site.
"How can Aadhaar be deemed 'voluntary' if service delivery is being made dependent on it. This is a grave breach of public trust," Gopal Krishna of the Citizens Forum for Civil Liberties, said in a statement.
The forum noted that the scheme to link Aadhaar with service delivery was launched on October 20, despite Parliament not passing the National Identification Authority of India Bill, 2010, and the Parliamentary Standing Committee, headed by senior BJP leader Yashwant Sinha, having rejected the UID and biometric data collection terming it as an "illegal" and "unethical" project.
The launch exercise on October 20 stands exposed because it is officially admitting that UID-Aadhaar is mandatory contrary to what was claimed at its launch in Maharashtra on September 29, 2010, the forum said, and added that the creeping of voluntariness into compulsion through threat of discontinuance of services has been roundly castigated by Yashwant Sinha.
The forum alleged that the proposed cash transfer of benefits and entitlements through Aadhaar-linked bank accounts of the beneficiaries was crafted to make it mandatory.
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From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
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Sent: Saturday, 20 October 2012 9:46 AM
Subject: SOP on Demand Arrear-CBDT
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