Spooked by the current dismal state of the primary markets and operators having a field day at the cost of the investors, SEBI seems to have got a flash of insight. It seems to have concluded that the crux of the problem is these small cap companies. And hence it has sought to change the definition itself of the small companies seeking relisting, starting July 2011.
Making it tougher or rather not wanting dubious small companies at all on the bourses, SEBI has announced new norms for small companies seeking relisting. These rules have been mended specifically for companies wanting to migrate from the regional stock exchanges to BSE and for those who have been suspended for non-compliance of listing agreements for over a year.
These companies will now be able to relist only if they raise their minimum paid-up capital from the present Rs.3 crore to at least Rs.10 crore. And SEBI has also stipulated a minimum net worth criterion of Rs.50 crore in three consecutive financial years.
What usually happens is that when such penny stocks get relisted, their share price shoots through the roof, defying all logic and fundamentals. 2009 saw a spate of around 16 such stocks and 25 stocks in 2010, which had flouted compliance norms, were suspended for some time (some for years) but soon got relisted. And those stocks, till today, surge on the bourses, unbridled, obviously beating all common sense. Promoters of these companies typically seek relisting when the markets are up but not in the current market conditions.
Take the case of Pacific Industries. It was relisted in May 2009 and its equity is Rs.1.35 crore only, market cap is Rs.22 crore. Its two week average trading volume is 305 shares. There is Quantum Digital, whose market cap is Rs.2 crore, equity at Rs.3 crore and today’s volume is 50 shares. Pithampur Steels has a market cap of Rs.7 crore, with equity of Rs.3.96 crore, with two week average volumes slightly better at 5500 shares.
Pasupati Fincap was relisted in Jan 2010 after it had been suspended from trading for 8 years over non compliance issues. The day it got listed, it zoomed to a high of Rs.50 and closed at Rs.23. This for a company whose quarterly net profit never crossed the two digit mark, in lakhs and not in crore. Its market cap stands at a dismal Rs.5 crore and average volume is 48 shares.
Then there are companies which get relisted and then change their names. Take the case of Midpoint Software. After relisting as a software company, it changed its name to NHC Foods. A food company from software! Now that’s what we call true diversification! It’s equity is at Rs.3.25 crore, market cap at Rs.11 crore and today, only one share has changed hands so far.
Relisting has become a modus operandi for operators to get such suspended stocks relisted, rig the price to unheard and undeserving heights and then provide exit route for promoters and operators, thus trapping gullible investors.
There are around 6000 odd shares listed on the BSE of which only one third are liquid in the true context. And that is the statistics which SEBI needs to actually work on – make more of the listed stocks liquid and get more investors rather than seeing the current over 90% volume only in the F&O section.