Relisting drama, the new route for price rigging

Companies desirous of getting their securities listed on the BSE are required to enter an agreement with the exchange called Listing Agreement, under which they are required to make certain disclosures and perform certain acts, failing which the company may face some disciplinary action, including suspension/delisting of securities. Hundreds of listed companies are now either suspended or delisted for violation of listing norms. Some of these companies have started coming forward for relisting the securities following the market boom in 2007-08. In short, these companies comply with the listing norms and get their shares listed again for trading on stock exchanges.

•How is manipulation taking place?

Companies coming for relisting are small in size with limited operations — popularly known as penny stocks on Dalal Street. On the first day of relisting (or listing), there’s no circuit-breaker mechanism and prices go up or down without limits. Normally, prices are not allowed to go up or down by 5 per cent or 20 per cent depending on the category of shares. In the absence of circuit-breaker, operators push up the share price of the newly listed company to sky-high levels. However, it’s not necessary that companies are involved in this game. Operators can do it on their own or with the support of company managements. When prices go up, they unload their shares. Eventually prices will come crashing down as the rise is purely artificial without any fundamental support.

•Which are the two recent examples?

On Wednesday, KGN Industries shares rose by a whopping 76,000 per cent to Rs 55,000 from Rs 72 — on a single day before trading was suspended. The scrip was relisted on Wednesday after it was delisted seven years ago. On Friday, the scrip fell by maximum permissible 5 per cent to Rs 4,863. On Thursday, when Sylph Technologies which was delisted seven years ago was relisted, the scrip touched Rs 800 as against just 80 paise when it was last traded. The scrip later closed at Rs 200. In both the cases, the phenomenal rise happened in thin volumes — the volume in KGN was 827 shares and Sylph 6,500 shares.

•Why companies are going for relisting now?

The sharp rise in the Sensex in 2007-08 prompted many company promoters to look at relisting their shares again. The incentive is that once a company is relisted, promoters can unload the shares and make money. Operators also join the party and make money in the process. The BSE has suspended or delisted around 1,000 companies for various violations of listing agreement.

•What is the role of regulators?

The stock exchange is the first level of regulation. In the case of KGN, BSE did act when it noticed the abnormal price rise. “During the early hours of trading, it was discovered that orders were being placed at an unrealistic price. In order not to distort price discovery process, as few orders were being placed at unrealistic prices, trading of the scrip was suspended at 12.20 hrs as a proactive surveillance measure,” BSE said. Sebi had proposed 20 per cent circuit breaker on the listing/relisting day last year. However, this proposal was not implemented. “On the opening day of trading of scrips post revocation of suspension, there are no price bands, in order to allow the market to discover the scrip’s price,” the BSE said.

•Whither common investors?

Common investors can easily fall into the trap of market manipulators on the listing day. Investors rush to buy when they see such phenomenal rise — only to burn their fingers when prices come crashing down. The market may witness more relisting in the coming days as many dud firms are in the process of getting their shares traded on the exchanges again.