There are more penny stocks in the domestic equity markets now. The majority of these are being classified as illiquid counters (effectively junk stocks) by stock exchanges. With very little volumes, these stocks leave no exit opportunity for investors. Most of these shares are out of the investment mandate of mutual funds and large institutional investors.
Penny stocks are those that trade below their face value, which is between Rs 1 and Rs 10 for listed companies.
Already, India is one of the countries with the highest number of penny stocks and often it is the retail investors who trade in these counters.
Between 20 and 25 per cent equity scrips traded on the exchanges made it to the list of penny stocks in the past eight months. This is after the benchmark equity indices, Sensex and Nifty, which were trading near their annual highs in November 2010, fell sharply. The fall took a toll on the overall trading volumes.
Last month, some 580-630 stocks were trading below their face value on the BSE, compared to 450-490 stocks in November 2010. The 30-share Sensex was trading near the 20,000 level during the first week of November. However, the index witnessed a fall a few days after the listing of Coal India. Since then, it has been trading in a narrow range.
Some of the additions to the list also include some IPOs listed in the past couple of years. These include Future Ventures, listed last month, Tipupati Inks, listed last year, and Birla Cotsyn, Decolight Ceramics, Sita Shree Food Products and Celebrity Fashion among other IPOs listed in the past couple of years. These stocks are down 60-90 per cent from their IPO prices.
“It is mainly some of the mid- and small-cap stocks which have now turned into penny counters. In most such stocks, there is high operator activity. Their prices fell in the past few months after the Sebi order against operators. Retail investor activity is at its nadir and volumes in many more such stocks will remain till the overall market improves,” said Kishor Ostwal, managing director of Mumbai-based CNI Research.
Market players say in a majority of such stocks, there is no fundamental reason for the rise and fall in prices. “They were bad IPOs, mainly operator driven. Now it will take a long time for these stocks to bounce back. The regulator should look into the trading pattern in these counters,” said a stock broker.
Volumes in the domestic markets are dry because of the lack of funding and also the refusal of stock brokers to allow their clients to trade in small counters. Non-banking finance companies, mainly promoted by stock broking houses, were known to fund traders to punt in stocks. However, brokers stopped their funding activity in the past few months for fear of raising regulatory hackles. Sebi has been investigating several brokers for funding operators involved in price rigging.