'Don't panic at Sebi crackdown'

In a penal order having probably the widest impact in terms of numbers of listed stocks, the Securities and Exchange Board of India (Sebi) yesterday cracked down on the promoters of some 105 companies for not meeting the  deadline for compliance with the minimum public shareholding norms.

In June 2010, the central government amended the rules to say all listed companies should ensure at least 25 per cent of their total equity was held by non-promoter shareholders. About 200 companies fell short of this number last year. While half tried and succeeded in bringing down the promoter shareholding, these 105 failed to meet the deadline, facing the wrath of the regulator.

If you are a shareholder in one of those stocks, you have reason to be worried but don’t press the sell button yet, say experts.

Sebi passed this order in line with its repeated warnings on the issue over the past year. Essentially, it has directed the order on the promoters and directors of these companies only, clamping on their voting rights and other rights such as dividends for the promoters. It has also restricted them from approaching the market for raising money. Therefore, while the order will hurt them badly, it is unlikely to hurt the stock itself.

However, investors can forget any dividend announcement or other benevolent corporate action until the promoters settle the issue with Sebi. They also need to keep a close look at the unfolding event,s including how the promoters and directors react to the Sebi move.

Since the order also restricts directors from new appointments, some on the boards of these companies might try to distance themselves from the company by resigning. Such knee-jerk action could hurt the stock.

The Sebi order said the regulator might also take action such as levying monetary penalty, moving the scrip to the trade to trade segment and excluding it from the futures & options segment.

If the promoters stick to their guns and these threatened actions actually materialise, this could hurt the stock prices badly. And, cramp the exit routes for small shareholders like you and I. However, if the errant companies start falling in line and manage to comply within the next 21 days, things could turn for the better. Though fundamentally nothing changes, a wider public holding is generally likely to result in a better price discovery for the stock.

“Once 25 per cent public shareholding is achieved, some of the better stocks would come on the radar of institutions such as mutual funds. That could lift the prices up,” said Arun Kejriwal, founder, Kejriwal Research and Investment Services.

On the flip side, if your shares were overpriced due to the low float, then the forced fresh supply could drag it down to a more reasonable valuation, in which case one can consider buying more shares to average out the cost of acquisition.