Stock market rally leads to fall in illiquid counter numbers

With trading interest returning to stock markets, the number of illiquid counters on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) has declined sharply since the beginning of 2009.

The decrease indicates markets have gained more depth in this period. The classification exercise was jointly carried out by members from BSE, NSE and the Securities and Exchange Board of India. Following this exercise, the exchanges have asked investors to exercise additional due diligence while trading in such stocks, either on own accounts or on behalf of clients.

The latest data show stocks of 13 per cent of the companies listed on NSE and 33 per cent of those on BSE have been classified as illiquid by the exchanges, compared to 30 per cent on NSE and 40 per cent on BSE at the beginning of this year. On NSE, the current number of illiquid stocks was 165 of over 1,200 listed, while on BSE it was 1,601 of over 4,700. At the beginning of the year, it was 395 on NSE and over 1,800 on BSE.

After the market crash of October 2008, even the newly listed initial public offers, the share price of which had doubled within a few days of listing, had found mention in the list of illiquid stocks as volumes dried. However, volumes in both cash as well as the derivative segment have doubled since January 2009, as the key benchmark index, the BSE Sensex, gained over 100 percent from its historic lows last year. Still, some IPOs listed in the past year can still be found on the list, such as Simplex Projects and Celebrity Fashion.

While the list of illiquid stocks has gone down, market players are wary of high volumes in some of the low-rung stocks. “Volumes in lower-rung stocks are highly operator driven and it can become difficult for traders to unwind their positions when there is some correction in the broader markets,” said a research analyst at a brokerage firm.

The classification exercise was jointly carried out by members from BSE, NSE and the Securities and Exchange Board of India. Following this exercise, the exchanges have asked investors to exercise additional due diligence while trading in such stocks, either on own accounts or on behalf of clients.