BSE faces Sebi music on penny stock fiasco

The abnormal price rise in two penny stocks "" KGN Industries and Sylph Technologies "" will top the agenda of the weekly surveillance meeting that the Securities and Exchange Board of India holds with stock exchanges.

The next meeting is scheduled on Monday.

Sources familiar with the developments said Sebi Chairman C B Bhave has asked for an immediate explanation on the issue from the Bombay Stock Exchange (BSE), on which both the stocks are listed.

Both the stocks had shot up nearly 100,000 per cent in a single trading session on measly volumes on the opening day after relisting.

Though BSE had ordered an immediate inquiry into the matter, it attracted a lot of criticism from market participants for allowing the stocks to trade on the next day too.

Both Sylph Technologies and KGN Industries did not attract any circuit filter as the same is not applicable on the first day when a stock re-lists for the purpose of 'fair price discovery'.

Market players said KGN and Sylph have made a mockery of the so-called price discovery mechanism for stocks on the day of relisting, which was designed to leave the circuit filter open in order to enable the members to deal in the scrip at a realistic price level.

This loophole of open circuit filter on price movements for a certain stock category, on the day of relisting, is being manipulated by a set of traders.

A lot of penny stocks, which re-list on BSE after fulfilling the compliance norms, have negligible shares in the demat form.

For instance, less than 2 per cent shares of Sylph Technologies are in demat form, making it difficult to keep a track of the shareholders. Sources said the regulator has also taken a strict note of this issue too.

While the National Stock Exchange (NSE) does not allow listing of penny stocks, over 1,000 such stocks have been suspended from trading by BSE as the companies had failed to adhere to the listing agreement norms.

The so-called penny stocks represent companies that have not complied with various provisions of the listing agreement, typically meaning investors should be more careful in buying or selling such stocks.

Sebi had last year proposed at least a 20 per cent circuit filter on the first day of listing itself. However, the proposal has not yet been implemented.