Retail investors hold around Rs 1,000 crore in bankrupt listed companies

Each bankrupt company has around 7,500 retail investors on a median basis

Retail investors, hoping for a turnaround in listed companies mired in bankruptcy proceedings, hold significant stakes in these entities, reveals a Business Standard analysis. A study of 115 companies undergoing proceedings under the Insolvency and Bankruptcy Code (IBC) shows that retail investors hold stakes in a majority of them.

There are nearly 7,500 individual shareholders per company on a median basis, holding a nominal share capital of up to Rs 1 lakh for the full sample. They hold a median stake of 15.8 per cent. The analysis, based on data as on January 21, 2021, shows that the sum of the value held by individual shareholders is Rs 964 crore across the sample.  

The total value of shares held rises to Rs 3,074 crore if you include individual shareholders holding nominal share capital in excess of Rs 1 lakh. This typically refers to richer investors who buy bigger stakes in a company. Their median stake is 20.8 per cent. Many of these shares have already crashed in price, suggesting that the stake may have been worth more earlier.

A total of 101 companies are worth less than Rs 100 crore in market capitalisation. Around 46 are worth less than Rs 10 crore. 

Jimeet Modi, founder and chief executive officer at Samco Securities says that retail investors should be looking to get out of companies entering bankruptcy rather than hold on because losses are more likely than not to occur for these listed firms. “In nine out of 10 cases the equity shareholders are going to get wiped out.”

There have been 4,008 companies admitted under the Corporate Insolvency Resolution Process (CIRP) of the IBC since inception, according to the Reserve Bank of India’s January 2021 Financial Stability Report. The report notes that nearly half of the closed CIRP cases resulted in liquidation orders. It says that for 73.5 per cent of cases for which data is available showed corporate debtors which were defunct or had been with the Board for Industrial and Financial Reconstruction (BIFR), an earlier body which dealt with such companies.  

“...the economic value in most cases had already eroded before they were admitted... These corporate debtors had assets, on average, valued at less than five per cent of the outstanding debt amount,” it said.

Samco’s Modi says many investors get into such companies hoping that the share price will rally. He says that many think that there is not much downside when the share price is already low, say, Rs 10, without realising that they can still suffer a 100 per cent loss in such stocks.

Independent market analyst Ambareesh Baliga says existing shareholder value is significantly eroded even when an acquirer comes through to turn around the company. The additional capital infused dilutes the stake of existing shareholders to a fraction of the original price. Coming back just to breakeven levels can be a tough ask. "To get that sort of return is going to take ages," he adds.