Penny stocks are generally valued under Rs 10. These stocks are said to be highly risky because of their low liquidity. Their market capitalisation is usually very less.
In the past, the market regulator and income tax department have unearthed huge scams that were carried out using penny stocks. 11,000 cases of penny stock abuse came under the Sebi's radar in May last year. The entities had allegedly misused capital gains provisions to evade Rs 34,000 crore in taxes to the income tax (I-T) department, as reported earlier by the Business Standard.
Many international stock exchanges have a similar requirement. For instance, a company needs to maintain a free-float market capitalisation of a minimum of $50 million over a 30-day period in order to remain listed on the New York Stock Exchange.
Free-float market capitalisation takes into consideration only those shares issued by the company that is readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares. A high free-float ensures better liquidity and may attract higher institutional participation.
However, the move might be questioned given that India lags major markets in free-float m-cap, as reported earlier by Business Standard. This is usually due to large promoter holdings in companies.
The Livemint report further stated that the Sebi might be planning to issue a consultation paper on this proposal.
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