Promoters of suspended stocks let off lightly

There are some 1,200 stocks in Indian exchanges whose trading has been suspended. While suspending trading may be one way of penalising unscrupulous promoters who get their stocks listed in order to raise public money, it is hardly a consolation for investors.

On the contrary, suspension of trading helps these same promoters easily do the vanishing trick, even while the Securities and Exchange Board of India would feel it has done its job.

Against this backdrop, it was good to see SEBI, earlier this week, issuing a new set of rules for suspension and revocation of trading in securities.

Investors, hurt so far by the inaction of the regulator, should feel relieved that it has now woken up to the issue.

While these rules will provide some reprieve to investors by providing an extended window for selling stocks after suspension, it is not strong enough to bring errant promoters to book and make them redress the investors adequately. SEBI might have to review these procedures again after a year, to make changes wherever needed.

Current rules

The current rules are skewed in favour of promoters who wish to fade away from investors’ memories. Stock of a company is suspended from trading if it does not adhere to the rules of stock exchanges (laid out in the listing agreement) such as not redressing investor complaints, not filing financial statements, shareholding pattern and governance report, and so on for two consecutive quarters. Non-compliance with these rules thus provides an easy exit opportunity for promoters.

Exchanges have to issue notice to investors 21 days prior to the suspension. If the company does not redress the complaint in that period, the trading in that stock ceases. Investors, not aware of the notice, are left holding shares from which there is virtually no exit; unless the suspension is revoked after the company fulfils the mandatory requirements.

Key changes

Some of the key changes made to the existing rules include moving the shares to Z category for a short period between the issue of notice on trading suspension and the actual suspension. While trading in this category, all transactions need to be settled with delivery.

When the notice of suspension is issued by the exchanges, the promoter’s shares will be frozen; in other words, the promoters will not be allowed to trade in the stock market.

Following suspension, trading will be allowed in the stock for six months in the first trading day of every week. Moving the stocks to Z category prior to suspension is a good idea. Investors who are not aware of the suspension notice and unwittingly buy the stock can be warned once they see that it is trading in a different category.

Prices are likely to plummet once they are moved to the new category thus warning unwary holders of the stock that something is amiss, forcing them to act.

Keeping a window open every week for six months after suspension is also likely to help investors who realise too late that the stock has stopped trading. Prices are likely to crash in the weekly window or while trading in Z category; so regulators could consider removing circuit filters in this period. Else the stocks will be locked at the lower circuit with no trade taking place in these sessions.

The intricate rules on fining a company — based on the type of default and the number of days — is, however, not likely to be effective. Only those companies that want to continue being listed on the stock exchanges but have missed filing the mandatory information due to exceptional circumstances, are likely to pay the fine to make their stock commence trading again.

No difference

But when promoters have made up their minds to exit the stock market, the fines are not going to help. Many of the currently suspended companies such as Jupiter Biosciences, Maars Software and Mascon Global have promoter holding at less than 5 per cent showing wilful act on part of promoters to get the stock suspended.

Further, the rules lay down that companies that do not pay the fine nor file the requisite reports will be suspended, thus keeping open the suspension route for promoters to escape.

While the rules talk about the stocks that are to be suspended in future, there is no mention of the current list of suspended stocks.

A formula needs to be devised for giving a closure to these stocks as well.

The rules should include a clause that stocks suspended for more than two years ought to be delisted. The promoters should be made to buy back shares from the public shareholders or face prosecution. If the promoters are untraceable, the shareholders need to be informed about this and the shares should be cancelled so that investors do not have to pay demat charges on suspended shares.

Pulling up promoters

The New Companies Bill empowers investors to file a class-action suit against promoters. Investors can use this weapon to take action against promoters who let their stock suspend. The exchanges should also publish the names of all such defaulting promoters and directors of such companies on its website so that they do not resurface with another company name.

A quick glance down the list of currently suspended companies shows that most companies were mired in problems of some kind.

Constant losses have eroded the assets of many with the networth turning negative. Parekh Platinum, Baroda Rayon and Usha Ispat are cases in point.

It is, therefore, up to the investor to do due diligence while investing in securities and take the indirect route (mutual funds) if they do not have time to monitor their portfolio. Investing in stocks is a risky game, after all

COMMENT NOW