Restrict Trading in 331 Companies - Retail investors are being penalised for the alleged fault of promoters..!

Restrict Trading in 331 Companies - Retail investors are being penalised for the alleged fault of promoters..!

by Mr. NISHANTH VASUDEVAN

The Securities & Exchange Board of India's (SEBI's) surprise move, asking exchanges to restrict trading in 331 companies, has jolted many in the market. While the overnight suspension of trading in these stocks was a bolt from the blue, what has left market participants scratching their heads is the presence of some notable small-cap companies.

Trading in stocks which were included in the “shell companies“ list has been suspended based on the stages of the so-called Graded Surveillance Measure (GSM). The restrictions on trading in these stocks are different at various stages.

For example, investors wanting to buy stocks placed in the fifth and sixth stages have to pay a deposit of 200% of the trade value. Similarly , many of these stocks will be allowed to be traded only once a month.

The latest SEBI move is seen as part of the efforts of the government and regulators to clamp down on money laundering. But, what's perplexing market watchers is that the regulator did not disclose the alleged illegal activities by these companies. The only giveaway was SEBI identified them as shell companies, which are traditionally firms that do not have any major assets and have been used for tax evasion.

The debate here is whether some of these companies, which have influential shareholders such as large mutual funds, are just shell companies to launder money .

One theory doing the rounds in the market is some of the firms were engaged in unlawful activities during the government's demonetisation drive. This though could not be ascertained independently .

While the regulator and exchanges have cracked down on companies, which they suspected were helping evade taxes, in the past, this would have been seen as the severest move by the regulator because of the speed of its implementation and the superior profile of some of the companies involved. By suspending trading in these stocks overnight, SEBI has managed to keep an element of surprise, giving those involved little time to wriggle out of the arrangement.

While the regulatory clean-up will certainly instill fear among the wrong-doers, it is also having unintended consequences. As of today, retail investors have been left holding duds, unable to fathom when they would be able to exit these investments.

One could point fingers at them for putting money in companies with no revenues or assets. There are certainly many such firms in the list. But, how can they be blamed for investing in firms with affluent shareholders and strong growth prospects.

Many of these stocks will be traded only once in a month and it won't be surprising to see sell orders far outnumbering buy orders. Few investors would be interested in buying stocks that are under the regulatory glare by paying a deposit of 200% of the total value of the purchases.

Here, retail investors are being penalised for the alleged fault of promoters.

In future, Sebi, while attempting to eradicate such misconducts in the stock market, needs to keep in mind the immediate interests of public shareholders as well.

Share: