Keep your nerve and don’t exit at once. For all you know, there could be a turnaround story.
When Everonn Education's managing director, P Kishore, was arrested last week on bribery charges, its stock took a heavy beating. Since the arrest, the stock has fallen 40 per cent, hitting the lower circuit on Friday and on Monday.
Retail investors who have invested in this mid-cap company are suddenly finding themselves helpless. Quite similar to the day when Satyam Computer's founder, B Ramalinga Raju, wrote a letter to the Securities and Exchange Board of India, admitting to 'cooking up' the company's balance sheets. Satyam Computer, now Mahindra Satyam, had crashed 77 per cent in a single day.
In the past few months, there have been several instances of high-profile companies and managements in deep trouble. There are officials of top telecom companies in jail due to the 2G scam.
|TIMING THE EXIT
|* Hold on to the shares and wait for further clarity to emerge, even though it may not come immediately
|* If you see that good things are being planned for the company, take a chance and remain invested
|* But if it takes too long for clarity on the matter, one can exit the stock, even if it means booking losses, and re-enter when things get better
|* Companies that heavily depend on promoters or CEOs should be looked at with caution when such events happen
For retail investors, who are likely to know about these scams from television and newspapers rather than have any inside information, there is little to do. The sharp fall in share price does not provide an exit route. Yes, one could exit, but losses will be significant.
In such circumstances, market experts say an investor should hold on to the shares and wait for clarity to emerge.
Deven Choksey, managing director of KR Choksey Securities, says initially, there is a knee-jerk reaction, leading to the sharp fall.
"One has to wait and watch for some clarity. There will be a lot of nervousness around these companies until they announce plans about future course of action," he adds.
In fact, Everonn took quick action and notified the exchanges that it had appointed wholetime director Susha John as its chief executive officer on Friday. But the stock continued to fall.
In many cases, action may not come immediately and the solution may be prolonged.
For instance, the Satyam scam broke in January and there was a good three months before Tech Mahindra bought it. Till that time, there was little clarity.
The arrest of Shahid Balwa of D B Realty led to the stock falling 23 per cent within one month.
News about its troubles like stalling of projects and lack of approval led to the stock hitting a 52-week low of Rs 60.
In such circumstances, market experts say if there is a prolonged phase of insecurity — say, over six months — one can exit the stock.
"It is more of a qualitative judgement. If you see good things are being planned, for instance sale of Satyam Computer, one can take a chance with the company. Otherwise, long periods of insecurity are not good for the investor," says the head of research of a broking firm.
He adds that if things change drastically, one can always re-enter.
From an all-time low of Rs 11, Mahindra Satyam is now trading at Rs 75.25.
The most important thing, as Jagannadham Thunuguntla, head (equities) at SMC Global, says, is the risk-appetite of the investor.
"Companies that heavily depend on promoters or CEOs, should be looked at with caution when such events happen," he says.