In April 2013, market regulator Sebi came up with a ruling pertaining to thinly-traded stocks. It ordered that thinly-traded stocks should be traded only through hourly 'call auctions' system to curb price manipulations and malpractice due to low volume.
According to it, the trading day was to be split into sessions of an hour each wherein the orders were to be entered in the first 45 minutes, with those orders to be executed in the next 15 minutes towards the end of the session. Sebi also listed criteria to categorise a particular stock as illiquid wherein initially 2,050 companies made the list.
Now, Sebi has revised its criteria effective January and with the new ruling only 458 companies are in the ill-liquid stock list.
When we analysed the stocks with old criteria in the May 2013 issue, we found it featured companies with a large market capitalisation; as high as Rs 6,700 crore. On further analysis it came out that these companies were trading at quite extraordinary valuations and in we praised Sebi for the steps to curb speculation in these stocks. But now with the new ruling, most of these companies will go out of the list and will again start trading normally as before, only to leave behind very tiny companies in the 'call auction' category.
We also analysed how successful Sebi had been till now in its motive to curb speculations and mad volatility. We took the top market cap companies from the earlier list and compared their volatility before the call auction system and thereafter.
It came out that while volatility had definitely fallen, its levels remained high. Also, the valuations which were earlier termed irrational still remain intact. There is a strong reason to believe that intra-day punters who used to find these stocks very opportunistic may start riding them again.
So, as a fundamental investor, these stocks should find their way into your portfolio only when they effect a turnaround their fundamentals and find right valuations.
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