In the first week of April 2013, Sebi came out with an order that mandated that thinly-traded stocks should be traded only through hourly ‘call auctions’ system.
Under this new system, the trading day has been split into sessions of an hour each wherein the orders will be entered during the first 45 minutes and executed in the next 15 minutes towards the end of the session.
The ruling came from Sebi to curb price manipulations and malpractices as these stocks are governed by a few intra-day punters who are easily able to manipulate prices due to the share’s low volume.
Some salient features we noticed in the BSE list of illiquid stocks are:
1. The number of shareholders is less
2. Number of shares in dematerialised forms is very low
3. Public shareholding is quite low
4. 40 per cent of the companies are loss-making and yet have a high price to book value which clearly shows that these companies are overvalued
As a long-term value investor the Sebi ruling will not affect you. Moreover, none of our recommendation is from illiquid stocks
Going the right way
It is being argued that Sebi has treated these companies very harshly and liquidity may fall further as order execution will become very cumbersome. But, we think that Sebi has come up with an appropriate order to curb the false price escalations by few of the operators. These types of manipulations happen not only in tiny companies but also in companies with capitalisation ranging up to Rs 6,000 crore. We have sorted out companies with a market cap of more than Rs 100 crore with wide fluctuations in the price over the past 1 year. We found most of them were trading at extreme valuations even though many of them are yet to make profit. This is evident from their substantial high price to book value.