Will SEBI crack whip on ‘sensitive’ corporate actions?

Stock exchanges, to protect investor interests, are asking companies whose stocks witness significant movements if there were any market-sensitive decisions that could have contributed to the price volatility or volume surge.

ABB, Ackruti City, Vaibhav Gems Ltd were some of the stocks that had come under the scanner of the stock exchanges for significant price movements.

But even as the regulators seem to work overtime to safeguard the interests of investors, there is growing instance of companies announcing issue of bonus shares or stock split that make little sense because the normal reasons associated with such decisions does not seem not to have any significant bearing.

This raises doubts as to whether the investors in these counters are aware as to how sound their investment decisions are, whether the companies' performance warrants the stock price etc. More importantly, it raises curiosity as to who are buying into these stocks, whether they are genuine investors or mere punters who would like to cash in on the momentum which may trap gullible investors etc.

This is not to imply that the companies are at fault or their motives are questionable. But the disturbing question is why the stocks are behaving in the way they are doing when there are no fundamental reasons to back up the price movement. Another aspect to be noted is that at least in some of them, the promoters' holding is negligible — ranging from less than 5 per cent to 22 per cent.

Current scenario

The stock split strategy has been adopted for long by companies that have seen their stocks reach very high valuation, making them too hot for retail investors rendering the counter illiquid.

Recently many companies have resorted to this strategy but the fundamentals of the companies do not justify such a move. When Paraan Ltd announced stock split — from Rs 100 to Re 1 — some investors simply looking at the trading screen may smell an opportunity to make a kill as the stock is quoting around Rs 2,250. But the devil is in detail — in the company's financial performance.

There was no income from operations for the whole of last financial year; the turnover is zero during the nine months of the current FY. Yet the stock is trading at about Rs 2,250, raising questions as to who are the buyers. The stock saw a trading volume of 25 shares till 1.45 P.M. today and it is not clear if the buyers were aware of the company's financials before they chose to invest in it.

Tuni Textile Mills Ltd is another company that announced stock split, from Rs 10 to Re 1. The BSE stock price at about Rs 240 (face value Rs 10) today may look reason enough for gullible investors to go for it and in the BSE the trading volume soared to about 67000 shares by 1.30 pm on Thursday. In end-Sept quarter of 2010-11, the sales were a mere Rs 3.94 crore and the EPS Re 0.06. The promoters hold only 21.73 per cent stake in the company with an equity of Rs 13.06 crore.

Bafna Spinning Mills has decided to split the stock face value from Rs 5 to Re 1. But hold your breath- the stock is trading at just Rs 1.67!

Queer announcement

Even announcement of a generous 1: 1 bonus issue has not fired up the price of ACIL Cotton Industries Ltd's stock (face value Re 1) which was quoting at Rs 3.50 in the BSE today at 1 pm. The price was not surprising because the Q 3 EPS was a mere 37 paise but the volume was a surprise- 3.35 lakh shares were traded by 1 pm! But how will the company service the equity after bonus? The public shareholding in the company is a staggering 95.61 per cent.

When Lee & Nee Softwares Exports Ltd, which had earlier announced a 2: 1 rights issue and preferential allotment to promoters to raise resources for funding expansion plans, later decided to scrap the move, arguing that the `introduction of Minimum Alternative Tax (MAT) @18.5 per cent on Special Economic Zone (SEZ) units in the Finance Bill, 2011, the working results of Information Technology Companies in Special Economic Zone will be adversely affected and may not attract the investors to subscribe for and or invest with further issue of Capital in Equity shares of the Company to be raised by preferential allotment and right issue as envisaged earlier and the capital market may not behave positively' and decided to defer them` for the time being till such time as the board deems fit', few would have questioned the argument, till one had a look at the company's performance. For a company with an equity base of Rs 55.77 crore, the sales in the quarter ending Dec 31, 2010 was only Rs 30 lakh and the EPS Re 0.031. But it is trading less than its book value. Before the Inca Finlease Ltd' share face value was cut from Rs 10 to Rs 2 last month, it was quoting in the range of Rs 470-490 justifying the decision to split the stock face value to inject greater liquidity in the counter. But in the quarter ending Dec 2010, the income from operations was a mere Rs 7.04 lakh but there was `other operating income' of Rs 8 lakh and the net profit was Rs 10.37 lakh.

Still there was no EPS and its pre-split equity price would have given astronomical P/E! Even today, in the BSE the stock was quoting post split at Rs 101.

It is imperative for exchanges to intensely scrutinise the corporate announcements and caution the investors in case of equity dilution/ stock split/ buy back etc similar to cases where price/ volume volatility is witnessed and crack the whip where needed lest the gullible investors are left holding dud/ illiquid scrips.

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