Don't sell shares of illiquid firms in a hurry

If the company is profitable or pays dividends, it makes sense to retain stock

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Last week, when the Securities and Exchange Board of India (Sebi) used its Twitter handle to alert investors about public announcements of share purchase plans of companies, many were surprised because it is not unusual for brokers to inform about such plans.

Sebi’s tweet is for a good reason. According to the head of an investment advisory firm, investors are getting letters of an ‘open offer’ asking them to tender Mohan Meakins shares (which owns Old Monk brand) at Rs 60-80 a share. The letter looks like an original buyback offer from the company, and not from a third party. But it is not, because it does not adhere to Sebi’s guidelines of providing financial details of the company and stock in case of a buyback.

In the past, many such incidents have occurred. In 2010, many investors of Orissa Minerals Development Company (OMDC) received a letter from an unknown brokerage giving them an opportunity to exit the stock. They were offered Rs 50 for a share which looked attractive. The stock, listed on the Calcutta Stock Exchange, was quite illiquid, say market watchers. Those accepted the offer, realised it was a big mistake. OMDC, one of the oldest iron ore mining companies in the country, listed on the BSE in August 2010 making a stellar debut, hitting the five per cent upper circuit at Rs 20,475 a share.

No wonder, then, that Sebi’s tweet warns investors that a company needs to issue a ‘public announcement’ in newspapers and through stock exchanges for the benefit of investors whenever they need to acquire shares from the minority shareholders including in cases of de-listing and takeovers.

If you hold stocks of such companies, it makes sense to hold them especially if they are profitable companies. “The interest in shares of such companies rises only because someone has an insider information on new developments,” says executive vice-president with a brokerage firm. He adds the only option with investor is to track them at least once a year and see if they continue to make profits.

Sanjiv Bhasin, executive vice-president at IIFL, says if investors don’t have the time, the means and the will to evaluate the companies, it’s better to exit the stock. “What is the use of holding on to an investment that’s dud and the owner doesn’t realise its potential?”

Manish Mittal, managing director of Mittal Securities, who deals in unlisted securities, says such offers exist in the unlisted space as well. This gives investors an option to monetise stocks. He says many are not even aware they hold such stocks. “The market for unlisted securities also runs like a stock market. Depending on demand and supply, the price varies. Sometimes, such sellers even make profits in such deals.”