Advantage BSE in block deals

The Bombay Stock Exchange (BSE) has widened its lead over the National Stock Exchange (NSE) in the block deal segment.
In 2008, the volume of block deals on BSE was Rs 16,377 crore, compared with NSE’s Rs 4,754 crore. The corresponding numbers for the previous year were Rs 15,180 crore and Rs 8,509 crore, respectively.
A block deal is a trade with a minimum quantity of 500,000 shares, or with a minimum value of Rs 5 crore through a single transaction window on the bourses.
Market experts attribute the high volume of block deals on BSE to low trading volumes in the cash market. This leads to more execution of block deals. BSE sees an average daily trading volume of Rs 3,000 crore in the cash market compared to Rs 7,000-8,000 crore on NSE.
Jagannadham Thunuguntla, chief executive officer of SMC Capitals, said since BSE in general has lower trading volumes than NSE, chances of spillover of a block deal are much less. This means deals can go through faster on BSE.
“On NSE where trading volumes are much higher, trading is done on a first-come-first-serve basis. So lesser number of trades gets entirely executed at one time,” added Thunuguntla.
However, things could be improving for NSE. Since January 2009, there have been six block deals on the exchange with a total volume of Rs 232 crore compared to four deals with Rs 56 crore volumes on BSE.
The situation is almost the same in case of bulk deals. While transaction in the bulk deal segment of BSE amounted to Rs 70, 657 crore in 2008, it was Rs 65,752 crore on NSE. A bulk deal takes place when 0.05 per cent of equity shares of a company listed in the exchange is transacted.
In aggregate terms, block deals have seen a dip of 11 per cent in 2008, compared to 2007. Even the number of trades has dropped 30 per cent. That is, there were 411 block deal trades in 2008, as against 589 in 2007.
Analysts said that high net worth individuals, foreign institutional investors and other big corporate investors have stayed away from large-sized deals last year, leading to the fall.
There could be a lull in the coming year as well. Siddharth Bhamre, fund manager (derivatives and equities), Angel Broking, said that the number of deals this year could either be lesser or just the same as last year.

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History of Indian Capital Markets

The history of the Indian capital markets and the stock market, in particular can be traced back to 1861 when the American Civil War began. The opening of the Suez Canal during the 1860s led to a tremendous increase inexports to the United Kingdom and United States.Several companies were formed during this period and many banks came to the fore to handle the finances relating to these trades. With many of these registered under the British Companies Act, the Stock Exchange,Mumbai, came into existence in 1875.It was an unincorporated body of stockbrokers, which started doing business in the city under a banyan tree.Business was essentially confined to company owners and brokers, with very little interest evinced by the general public. There had been much fluctuation in the stock market on account of the American war and the battles in Europe. Sir Premchand Roychand remained a kingpin for many years.
Sir Phiroze Jeejeebhoy was another who dominated the stock market scene from 1946 to 1980. His word was law and he had a great deal of influence over both brokers and the government. He was a good regulator and many crises were averted due to his wisdom and practicality. The BSE building, icon of the Indian capital markets, is called P.J. Tower in his memory.
The planning process started in India in 1951, with importance being given to the formation of institutions and markets The Securities Contract Regulation Act 1956 became the parent regulation after the Indian Contract Act 1872, a basic law to be followed by security markets in India. To regulate the issue of share prices, the Controller of Capital Issues Act (CCI) was passed in 1947.The stock markets have had many turbulent times in the last 140 years of their existence. The imposition of wealth and expenditure tax in 1957 by Mr. T.T.Krishnamachari, the then finance minister, led to a huge fall in the markets. The dividend freeze and tax on bonus issues in 1958-59 also had a negative impact. War with China in 1962 was another memorably bad year, with the resultant shortages increasing prices all round. This led to a ban on forward trading in commodity markets in 1966, which was again a very bad period, together with the introduction of the Gold Control Act in 1963. The markets have witnessed several golden times too. Retail investors began participating in the stock markets in a small way with the dilution of the FERA in 1978. Multinational companies, with operations in India, were forced to reduce foreign share holding to below a certain percentage, which led to a compulsory sale of shares or issuance of fresh stock. Indian investors, who applied for these shares, encountered a real lottery because those were the days when the CCI decided the price at which the shares could be issued.There was no free pricing and their formula was very conservative.The next big boom and mass participation by retail investors happened in 1980, with the entry of Mr.Dhirubhai Ambani. Dhirubhai can be said to be the father of modern capital markets. The Reliance public issue and subsequent issues on various Reliance companies generated huge interest. The general public was so unfamiliar with share certificates that Dhirubhai is rumoured to have distributed them to educate people.
Mr. V.P. Singh’s fiscal budget in 1984 was pathbreaking for it started the era of liberalization. The removal of estate duty and reduction of taxes led to a swell in the new issue market and there was a deluge of companies in 1985. Mr. Manmohan Singh as Finance Minister came with a reform agenda in 1991 and this led to a resurgence of interest in the capital markets, only to be punctured by the Harshad Mehta scam in 1992. The mid-1990s saw a rise in leasing company shares, and hundreds of companies, mainly listed in Gujarat, and got listed in the BSE. The end-1990s saw the emergence of Ketan Parekh and the information, communication and entertainment companies came into the limelight. This period also coincided with the dotcom bubble in the US, with software companies being the most favoured stocks.There was a melt down in software stock in early 2000.Mr. P Chidambaram continued the liberalization and reform process, opening up of the companies, lifting taxes on long-term gains and introducing short-term turnover tax. The markets have recovered since then and we have witnessed a sustained rally that has taken the index over 13000. Several systemic changes have taken place during the short history of modern capital markets. The setting up of the Securities and Exchange Board (SEBI) in 1992 was a landmark development. It got its act together, obtained the requisite powers and became effective in early 2000. The setting up of the National Stock Exchange in 1984, the introduction of online trading in 1995, the establishment of the depository in 1996,trade guarantee funds and derivatives trading in 2000, have made the markets safer. The introduction of the Fraudulent Trade Practices Act, Prevention of Insider Trading Act, Takeover Code and Corporate Governance Norms, are major developments in the capital markets over the last few years that has made the markets attractive to foreign institutional investors.This history shows us that retail investors are yet to play a substantial role in the market as long-term investors. Retail participation in India is very limited considering the overall savings of households. Investors who hold shares in limited companies and mutual fund units are about 20-30 million. Those who participated in secondary markets are 2-3 million. Capital markets will change completely if they grow beyond the cities and stock exchange centers reach the Indian villages. Both SEBI and retail participants should be active in spreading market wisdom and empowering investors in planning their finances and understanding the markets.
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Avoiding the delisting trap

Avoiding the delisting trap

Rakesh Rai
July 25, 2008

Welcome once again to the dark side of stock markets. Despite the renewed focus on investor protection by regulators and stock exchanges, there are companies that continue to tap the market for funds and vanish without a trace or are struck off the exchange for violations. These delisted companies leave in their wake a trail of clueless investors who have been cheated out of a fair value of their investments.
While a massive delisting exercise took place in June 1995, when 209 companies were delisted, it happened again in April 1996 (87 companies) and February 1997 (168). In the latest such move by the Bombay Stock Exchange (BSE) in 2004, 885 out of a total of 5,500 listed companies were struck off. While some of these were profit-making companies, others had a healthy book value per share, and so could tap the stock market for funds again. But what about the nearly 10 lakh shareholders who had bought shares in these companies? A majority weren’t even aware of the exercise as the exchange is under no obligation under the Sebi (Delisting of Securities) Guidelines 2003 to tell them when companies delist or are delisted.
“The pathetic monitoring of listed companies, non-enforcement of financial penalties (up to Rs 25 crore) under the Securities Contract (Regulation) Act 1956 and mechanical delisting by BSE has rewarded corporate misgovernance at the cost of small investors,” says Virendra Jain who runs investorhelpline.in. It has received hundreds of complaints against firms delisted in 2004.
Delisting can take place in two ways—voluntary and compulsory. In case of the former, the promoters approach the exchange and are allowed to delist after they fulfill the specified Sebi guidelines. However, it is the compulsory delisting for noncompliance with the terms of the listing agreement that creates most problems for individual investors. The delisting process begins when the exchange issues a notice to the errant company. If it doesn’t respond or comply within a certain timeframe, the company is suspended. If it continues to play rogue for another six months, it can be delisted. But exchanges normally don’t follow the guidelines and give the company 3-5 years to comply before delisting it.The exchanges justify hauling up such firms, saying they are within their rights to ask them to conform to regulations that are meant to promote good investing practices. The companies are even granted a grace period to fall in line, they argue. And as most violations relate to non-payment of annual listing fee, the exchanges say that they are providing a commercial service for which they deserve to be compensated. For instance, the companies with a share capital of up to Rs 5 crore have to cough up an annual listing fee of not more than Rs 10,000. That is small change for any listed company and promoter.
Delisting is the final step in a long, winding tale. The problem for investors begins when an exchange suspends trading in a company’s shares indefinitely. For investors, the implications are the same as delisting— they cannot sell their shares.
Who is to blame?
On the face of it, the primary responsibility appears to lie with the stock exchange concerned as it is the platform where the funds are raised and the only direct link with the companies. So it would seem natural that it should track the companies regularly and ensure compliance with the requirements under the listing agreement, instead of mechanically suspending and delisting them.But, according to the BSE, “Before suspending companies which are non-compliant, we give adequate notice to the market and media (through releases and advertisements). The existing shareholders should track these notices issued by the exchange.”So the responsibility also lies with the investors, who need to play a proactive role by keeping a close tab on the companies they have invested in. As for the notice period, it is often inadequate. At present, exchanges don’t have to forewarn investors about suspensions. In some cases where a notification is issued, the standard 10 days’ period is not enough for the news to trickle down to investors or for them to act. Experts say there should be a longer period to give investors a chance to exit. The counter-argument is that the time doesn’t matter; those who track it will spot it, those who don’t will miss it anyway.

Collateral damage

One problem of holding on to dud stocks is that you cannot claim losses under “capital gains” as it is neither a transfer nor a sale of shares or extinguishment of right. Another problem is in closing the demat account. The depository participant can close your demat account only if you have zero balance and that is impossible as the companies have been delisted and you cannot sell or transfer the shares. It is possible to achieve zero balance if you rematerialise your shares, that is, re-convert to physical shares, but this option is no good either. As there is a high probability that the delisted company has disappeared, who will rematerialise your shares? Which means you have to keep paying for holding on to the stocks and the demat account.
What you can do
Once a company has been delisted, there is nothing much you can do. However, there is hope in case of companies that have been suspended for non-compliance. One, there is a chance that they will comply. Two, you can keep track of such companies and complain to the exchange to trace them and request compliance, especially if it has been suspended for a technical lapse. There is time enough to do so as the company is usually not delisted for a few years. However, once the company is put in the “unknown” (or untraceable companies) list, even that option is lost.
Suspensions can be revoked if a company falls in line, but most don’t and end up being delisted. A company can relist after a cooling-off period of two years and after meeting other requirements, but they rarely do so. Given these worst-case scenarios, try to avoid hitting this dead end.
Buy what you knowDespite being able to buy blue chips in small lots, many investors chase lowpriced stocks in the hope of big returns. Don’t invest in unknown, low-priced stocks unless you understand the associated risks—suspension and delisting being one of them—and are willing to put up with these. If not, stick to known companies that are good, running businesses and whose stock is traded in good numbers every day.
Track your stockIf you can’t resist taking a punt on penny stocks, at least track them. Given their obscure nature, you need to be more involved in this exercise than you would for frontline stocks. If a company doesn’t disclose its results or send you annual reports, or delays dividend payments, it could be headed for trouble. Stock exchange notices that haul up a company for violations are also warning signs. According to a BSE spokesperson, “The Sebi (Delisting of Securities) Guidelines 2003 provide an investor the right to claim compensation from the promoters. However, in their best interests, the investors have to monitor the quality of their investment constantly and take corrective measures before it is too late.”
Check with other stock exchangesIf the shares are delisted, check if they are also delisted from all the stock exchanges where they were initially offered. Usually, delisting first takes place from the optional stock exchanges, not from the regional stock exchanges.
Approach the regulatorAccording to Sebi’s delisting guidelines, promoters of defaulting companies are liable to buy shares from the investors wanting to exit. For this, you have to approach the exchange, which will appoint an arbitrator. After hearing you and the promoter, if present, he will decide the price at which the promoter has to buy your shares. Again, it’s good on paper, but not enforceable, as promoters can’t be tracked down and forced to pay up. Your best option is to avoid a ride with these fly-by-night firms.
Wait for a relistingIf the company is in good financial health and relists, the issue can be taken up again. DLF, for instance, delisted from BSE in 1982 citing an increase in listing fee, and from the DSE in September 2003. There were over 1,300 shareholders who continued to hold its shares. So when the company relisted, it was forced to listen to them and offer compensation.
There is no way of knowing that a company will vanish, but a little homework before investing helps. Barely 50% of investors rely on prospectus before investing, most basing their decisions on past issue performances or hearsay. They must take into account all available information to avoid the nasty surprise of being stuck with dud shares in a delisted company.