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Rampant speculative activity poses capital loss risk to retail investors


Every bull run has its side-effect and the latest one was no exception to this phenomenon. The unprecedented rally in the stock market may have brought cheers to the investing community. However, it has also raised concerns about a potential risk, particularly to retail participants, arising out of unwarranted exuberance in illiquid, penny stocks that have been scaling dizzying heights on the bourses. Many such stocks have emerged as multi-baggers despite poor credentials.

This trend is akin to the frenzy witnessed during the dotcom boom of 2000, which saw many dud companies in the sector rally to abnormally high levels on speculative activity. A decade later shares of mining, trading or export companies were targeted by the operators. Many small investors were lured to invest in a large number of penny stocks only to find their hard-earned money taken away by smart operators, many a time acting in connivance with the unscrupulous promoters.

The current boom phase, it appears, is no exception to the victimising tendency prevalent among small gullible investors. There are indications that they may have been chasing penny shares of fundamentally weak companies, thereby risking their investment.

An analysis of the trading pattern in the current market shows share prices of many lesser-known or unknown companies have spurted to unprecedented levels even though their fundamentals hardly inspire any confidence. Many such examples figure on the list of the stocks that have consistently been hitting 52-week highs on BSE. The abnormal gains, however, have prompted the exchange to keep some of them under surveillance, signalling caution to investors.

It is imperative to mention here that none of the companies covered in this article have so far been subjected to any major regulatory investigation whatsoever for the trading patterns seen in their stocks. The sharp gains could have been the outcome of normal trading practice without a possibility of any foul play by the entities related or unrelated to the respective companies. Some possibilities such as restructuring of operations, capital reduction, change in management, turnaround hopes could have been the triggers behind the spurt in valuations.

While these triggers may have their merit, they hardly justify precariously high valuations in some of the cases.

Leading the pack of penny-turned-multi-bagger stocks is one Adinath Textiles, which BSE classifies as a textiles company. The stock scaled a 52-week high of Rs 101.7 on September 29, 2021, translating into a whooping 100 times returns over its 52-week low price of Rs 1.24 hit on November 18, 2020. Now look at the company’s fundamentals. The figures are far from impressive; it has reported absolutely no sales for the last two consecutive financial years and also for the June quarter of this year. All that it could a boast of was a meagre other income and net profit.

According to the BSE data, Adinath Textiles posted a net profit of Rs 32 lakh on other income of Rs 1.7 crore for FY 2020-21. This year’s performance is nothing significant to write home about, with the figures of Rs 23 lakh and Rs 54 lakh respectively for the quarter ended June 30, 2021. These figures hardly vouch for the multi-bagger status of the stock, which is currently quoting at an extraordinary PE (price/earnings ratio) of 134 times on the BSE. The BSE has categorised Adinath Textiles as ‘GSM:Stage 2’ company, which is as per Sebi’s Graded Surveillance Measures (GSM) aimed at alerting investors to be extra cautious while dealing in shares of the companies under surveillance.

Bombay Wire Ropes is another high PE company without any sales to its credit. Classified as an iron and steel products company by BSE, its shares hit a 52-week high of Rs 70.90 on September 29, 2021, a staggering 36 times gain in less than nine months from its 52-week low of Rs 1.98 recorded on January 8, 2021. Such huge returns appear unrealistic given the poor fundamentals of the company. With PE multiple of 1,336 times, the current valuation appears too much for too small a company. Bombay Wire Ropes reported a net profit of Rs 15 lakh on other income of Rs 45 lakh for FY 2020-21. It has an equity capital of Rs 53 lakh of which 64 per cent is held by the promoters, according to the BSE records. Bombay Wire Ropes is also categorized as “GST-Stage 2’ stock.

Proseed India is another example of multi-bagger stock where the company has not reported any sales consistently for last many quarters. The IT software products company, however, earned a net profit of Rs 12.7 crore during the year ended March 31, 2021, which was on account of some extraordinary income as reported to BSE. The stock hit the 5 per cent upper circuit limit to scale a new 52-week high at Rs 103.35 on September 30, 2021, a staggering 382 times returns in less than a year. The company has undergone corporate insolvency process under the Insolvency and Bankruptcy Code as part which the NCLT approved its resolution plan recently. Accordingly, its equity capital is reduced to Rs 31 lakh from Rs 9.61 crore. Proseed India is classified as ‘IRP:Stage 2’ company on the BSE website.

These few companies represent a large universe of penny-turned-multibagger stocks that are mushrooming amid extremely positive sentiment on the bourses. Investment in such stocks could expose retail investors to the risk of losing capital if they are highly manipulated. In fact, investors have already started bearing the brunt of their unwise decisions as reflected in share price movements in last few days of bearish market.

Adinath Textiles has been trading at lower circuit of 5 per cent with no buyers on the counter for last two consecutive days while trading is restricted in Bombay Wire Ropes with effect from September 30, 2021 as part of GSM action, according to the BSE website.

Stocks of fundamentally weak companies are generally classified as T and Z group on the BSE. The grouping is done on certain qualitative and quantitative parameters. The T group consists of the stocks settled on a trade-to-trade basis as a surveillance measure while the Z group includes companies which have failed to comply with BSE listing requirements and mandatory regulatory compliances. The T and Z group stocks are subjected to strict surveillance measures.

Their intra-day movement is mostly restricted to 5 per cent circuit filter, which is the maximum limit within which share price can move upward or downward in a single day. Besides, investors are required to take compulsory delivery of the shares under the 5 per cent circuit filter and no intra-day squaring off positions is allowed.

This makes difficult for small investors to exit when an operator in a highly manipulative stock goes on a selling spree after the price spurts to a certain level. The share price keeps hitting a lower circuit consistently for many days due to absence of buyers, causing huge loss to the trapped investors.

There have been many cases where the stock exchanges have suspended trading in penny-turned-multibagger shares for non-adherence to the rules and regulations pertaining to insider trading, mandatory compliances relating to filing of quarterly results, audited accounts and shareholding pattern, payment of listing fees etc. The errant among such companies have shown a tendency not to oblige, resulting in the indefinite suspension of trading and loss of the entire capital for investors. This should act as a deterrent for prospective investors against taking unsolicited calls in the current market.


(Vijay Gurav is a freelance market writer. Views are his own.)



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