Z group stocks delisting

This is the article that appeared in one of the business dailies...

NEW DELHI: The finance ministry will soon ask the Securities and Exchange Board of India (Sebi) to hasten the process of getting many penny stocks delisted from the Bombay Stock Exchange (BSE) as these stocks have long been placed under the Z category, denoting a lack of regulatory compliance. These listed stocks, very low on corporate governance and shunned by big investors, become easy prey for speculators as witnessed in the recent market rally.

Small investors without any access to market research get attracted to these stocks because of low prices, often quoting in single digit. On thin volumes, speculators manage to multiply prices of these stocks within no time, and manage to lure the unsuspecting small investor into buying them.

Officials said that the mere presence of these Z category stocks was a menace and their removal would naturally curb speculation in small-cap stocks. The only issue is how to go about delisting them in a manner that existing shareholders get an exit, they added. This will make it easy for stock exchanges to eliminate many companies which virtually exist on paper, but become targets for speculators during the market boom.Currently, there are over 9,000 listed companies on different exchanges in the country. But there is active trading in only about 5,000 of them. And many of them do not pay listing fees, despite prodding by exchange authorities.

According to a data, on the Delhi Stock Exchange, there are more than thousand companies which have not paid listing fees for years. Analysts said that these companies are also listed on the BSE. However, the National Stock Exchange (NSE) has more stringent norms and does not list penny stocks easily.

In the current rally, the value of many of these companies has shot up. Its surprising that companies, which had problems rustling up fees for listing, were being lapped up by investors, analysts added. The situation has been aggravated as the stock exchanges often do not penalise any company for committing lapses on other exchanges.

According to analysts, another ploy small-cap companies employ is to go in for reverse merger with medium-sized companies whose shares are being traded. The promoters of the merged company then use the buzz about the merger to sell their stake to gullible investors. There is also a mismatch between the current entry norms for new listings and existing listings to continue. Currently, new companies must have a capital base of at least Rs three crore to get listed. But there are no such rules for companies which are already listed, whose capital base has slipped way below Rs three crore.

Such companies could be given an option to either increase their capital base within a specific time period, or face delisting, sources said. However, the government has ruled out the possibility of reviving the Central Listing Authority, despite an existing gazzette notification. Officials said that independent authority might not be required if Sebi and the two major stock exchanges BSE and NSE exercised adequate surveillance.

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