Come April 8, more than one-third of the stocks traded on the Bombay Stock Exchange and 15 per cent of stocks traded on the National Stock Exchange cannot be bought or sold at an instant’s notice.
Orders for ‘buy’ and ‘sell’ in these scrips will be executed in eight minute bursts once every hour. Their crime? These are thinly traded stocks and susceptible to manipulation by market operators.
Monetary penalty
The new regulation will also impose a monetary penalty on investors wanting to buy any of these stocks at a price higher than what they sold it at, on a given trading day.
The Securities and Exchanges Board of India has ordered that thinly traded stocks should be traded only through hourly ‘call auctions’ system from April.
Under this system, the trading day will be split into sessions of an hour each wherein the orders can be entered in the first 45 minutes but order execution takes place only towards the end of the session.
The SEBI order defines ‘illiquid’ or ‘low’ volume stocks as those that trade less than 10,000 shares in a day or those in which less than 50 trades are executed in a session. More than 1,500 stocks listed on the BSE and 240 stocks on the NSE meet these criteria.
Indian exchanges sport the most number of listed companies among global stock exchanges, according to World Federation of Exchanges. SEBI monitors and checks price manipulation in the 5,000-odd securities listed on the BSE and around 1,600 on the NSE.
Moving thinly traded stocks to call auction mechanism appears to be motivated by the need to curb malpractices in these low-volume counters. Such stocks are vulnerable to price rigging by bear or bull operators since their prices can be easily moved through just a few trades.
With the stocks moving into call auctions, brokers think that investors holding these stocks are likely to face difficulties in trading them for two reasons.
Detrimental to investors
One, intra-day traders will move away from stocks that are traded only sporadically through the session. This will result in volumes drying up in these stocks. Absence of a counter-party could result in the trade not going through.
Two, unexecuted orders at the end of each hourly call auction session are to be cancelled. This means at the end of each hour, investors would have to check if their trades have been executed and re-enter the order if the trade is not done.
Large institutional investors, both foreign and domestic, will steer clear of such stocks since it will be next to impossible to place large orders through this route. This can lead to decline in the valuation ascribed to these stocks. The move will also lower the cash volumes on the BSE that derives a large portion of its turnover from such small-cap stocks.
Investors, however, need not be unduly worried since most of these are small or micro-cap stocks that have fallen out of investor radar due to consistently poor performance. Peacock Industries, SKM Egg, Pioneer Embroidery and so on fall in this category.
However, some fundamentally sound stocks such as Bannari Amman Sugar, Rane Brake and Lakshmi Mills also feature in this list due to their regional focus or high market price.