Number of illiquid stocks down 20% since lockdown as pandemic squeeze eases

Sachin P Mampatta | Business Standard
19th February

The list of stocks which have so few trades that exchanges create a special session for them to change hands has shrunk in the last six months.

The number of such illiquid stocks had risen to between 420-440 between March and June 2020. This roughly coincided with the lockdown to control the Covid-19 pandemic. It has now fallen by around a fifth, to 342 shows December quarter data from the BSE.

Retail investors looking to make money in illiquid stocks are unlikely to make an easy buck, with most companies’ fundamentals being rarely tracked, according to independent market expert S P Tulsian. An investor should think twice before investing in such companies without adequate research, according to Tulsian, suggesting that the chances of losses are high.

“He is digging his own grave,” he said.

Alok C Churiwala, managing director at Churiwala Securities, said that investors who feel they missed the bus during the recent run-up in the stock market should be careful about the kind of companies they invest in, to avoid burning their fingers.

“When markets are in this kind of frenzy there are many investors especially first-time investors who are taken in by the lure of penny stocks,” he said.

Stocks are declared illiquid when certain conditions that the regulator sets aren’t met. This includes criteria such as the daily average value of shares changing hands falling below Rs 2 lakh for the previous six months. It excludes companies who are valued at more than Rs 10 crore. Other factors for exclusion from the list may be the payment of dividends or having been profitable in two out of the last three years, a promoter who hasn’t pledged more than 20 per cent of his or her shares and meeting minimum criteria on assets that the company owns.

The exchanges hold a special session for stocks which are declared illiquid. This periodic call auction mechanism allows buyers and sellers to provide orders for a set period of time.

These are then matched and executed separately. There are also limits on how much the price of such a stock can move in a single day.

The rise in activity in stocks which were illiquid earlier comes even as a number of new investors have entered into the stock market. The number of investor accounts rose to 4.98 crore as of December 2020. There were 4.32 crore accounts as of June 2020. A total of 66 lakh accounts were added over a six month period as the stock market rose from its pandemic low, shows data from the Securities and Exchange Board of India.

The S&P BSE Sensex hit a low of 25638.9 on March 24th, 2020. The index whose movements are seen to be broadly representative of how the market is doing has since been on a rising spree. It touched an all-time high of 52516.76 on Tuesday.

Churiwala suggested avoiding leverage and only investing capital that can be put to work over the long-term. Valuations in the secondary market are already very high, he said.

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