Unending Woes Of Retail Investors

In the last 23 years, the Securities Exchange Board of India (SEBI) has done quite a fabulous job in controlling and regulating the securities’ markets and making the Indian bourses quite safe for the investors, especially the retail ones. Yet, there are various concerns that exist at the ground level, which usually shake the confidence of investors. To give SEBI credit where it is due, it has ushered in a high-tech real-time share trading platform and its monitoring, along with agility and transparency of the equity markets, which is the key for India’s growth in the global economic arena. Due to these developments, India has managed to become the darling of global investors in the form of foreign institutional investors (FIIs). As much as Rs 11,25,416 crore have been invested in the Indian markets till date.

Having said that, there are still many issues that continue to plague the stock market, often putting retail investors into a loss-making orbit. These problems have often come to the fore during the Investor Awareness Programme (IAP) that DSIJ has been conducting since the past many years, along with the BSE and brokerage firm IIFL in various parts of North India and Maharashtra. Herewith are highlighted some of the commonly heard problems, which SEBI needs to focus on and find a solution for.

Settling Shares of Delisted Companies

Adarsh Gopal, an investor from Lucknow, had a technical problem that even the BSE expert was not able to redress. Adarsh holds shares of two companies that got delisted from the stock exchange in 2008; yet, the dematerialized shares continue to exist in his DMAT account. Adarsh didn’t want to continue investing in the market after having suffered a huge loss during 2008 and therefore sold all his equity. However, the two scrips have remained in his account since the last seven years, as a result of which he has not been able to close his DMAT account. Unable to sell the scrips or close his account, he has been forced to pay an annual maintenance fee to the broker. There are many investors like Adarsh who have continued to face this dilemma since many years.

Both brokers and BSE officials have expressed their inability to resolve this problem due to the rules framed by SEBI. When a company gets delisted and in many cases the promoters have been absconding, little heed is paid to the re-materialization of the shares, which would be one way of resolving this issue. There is another angle attached to this problem. Actually, NSDL or CDSL charges a fee from all the depository participants (DP) even for stocks of these delisted companies and ultimately DP charges fees from the investors. Even in case NSDL or CDSL exempt DPs to pay any charge for these companies, DPs are not under their control and they don’t have any say on the fee structure.

Investors’ Unlimited Liability

This is a complexity that puts retail investors in a fix. Consider, for example, an investor with a scrip of the face value of Rs 500 that has been delisted from the exchange. As per the economic principle of business i.e. limited liability, his loss should be limited to just Rs 500 but in this case it is not so as he would be forced to pay AMC of DMAT account till eternity, even if he holds just one illiquid scrip. The fee could be Rs 100-500 per year. An investor wanted to know what would happen if he stopped paying the AMC. Legally, this would not be the right approach as the DP is authorised to recover its dues.Considering this, it is quite important on the part of investors that they take proper care while selecting stocks for their portfolio. It would be wiser to stay away from petty stocks as they may vanish overnight and such scrips gets affixed to the DMAT account. Also, the SEBI and the exchanges should look into the matter of “dud” stocks and work out a practical solution.
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Dodging the Delisting Trap

Quite in sync with the problem of settling the delisted companies’ shares is the persistent issue of ‘fishy’ companies that have been delisted from the stock exchanges. It’s a situation that has often put retail investors into a tremendous loss. Many investors at the IAPs have complained about the “abrupt” delisting of shares from the stock exchange and urged the SEBI and BSE not to allow such fishy companies to trade on exchanges so as to safeguard the interest of the investors. However, it is also true that SEBI or BSE cannot take complete responsibility for investors’ safety since investors too must take caution while selecting the stocks. Actually, SEBI and the exchanges move towards delisting of any scrip as a last resort action after all their other methods of making the defaulting company fall in line - as far as corporate governance norms are concerned - fail to provoke any correction.

Any scrip can be delisted in two ways - compulsory or voluntary. In case of voluntary delisting, a company has to follow stringent SEBI guidelines and has to take proper care of the interest of retail investors in terms of open offer and buyback. It is compulsory delisting that creates the problem. Usually compulsory delisting happens due to non-compliance with the terms of the listing agreement. Interestingly, most violations relate to non-payment of annual listing fee. The delisting process begins when the exchange issues a notice to the errant company. If it doesn’t respond or comply within a certain time frame, the company is suspended. If it continues to play rogue for another six months, it can be delisted. But exchanges normally don’t follow the guidelines and give a company 3-5 years to comply before delisting it.

Onus is on Investor

Stock exchanges are of the opinion that they usually inform investors about the state of the company and when a particular company starts to violate the compliance norms, adequate notice is given to the market before suspending it. Therefore, ultimately the onus is also on the part of the investors who should play a proactive role by keeping a close tab on the companies they have invested in. There is a 10-day notice period that an exchange usually gives to the market before suspending the trading of a company. This, however, is deemed inadequate and SEBI needs to look into this matter. In short, investors must remain cued in on market movements and SEBI notices so as to plan an exit in proper time

In the Hope of Relisting

In the matter of delisted companies’ shares, another interesting thing that we have noticed during IAPs is that various investors from Delhi, Kanpur, Mumbai and Pune have been getting anonymous calls from various persons who want to buy shares of these delisted companies. Investors of these shares are confused as to whether they should sell these shares or not and at what price. Actually there are people who are always in search of shares of companies that have been delisted from the exchanges but have decent financial credentials. These punters usually purchase such scrips at a petty cost and continue to hold them in the hope that on some day these companies would get relisted on the bourses, thus offering a chance of making a windfall profit. This happened in the case of DLF that got delisted in 1982 but was relisted. However, it’s quite a gamble and retail investors should avoid it. At times, promoters also try to repurchase the shares and operate through agents to purchase equity from the investors. In these cases, at what price these stocks would be sold to these agents is quite a mystery!