Investor's protection: STOCK EXCHANGE MUST ACT IN INVESTOR FRIENDLY MANNER

[C.A. DEV KUMAR KOTHARI]

Duty of Stock Exchange (S/E):

Stock Exchanges are a platform to provide liquidity in securities listed on them. S/E charge substantial amount listing fees and annual fees. Therefore, they must take responsibility to provide and maintain meaningful trading forum and circumstances which effectively provide liquidity and opportunity to trade in securities. However, unfortunately many actions regularly taken and many actions belatedly taken by stock exchanges impair liquidity and sometimes take away totally liquidity of securities. The actions like grouping into inferior groups like T group and Z group causes liquidity loss because no broker want to place order in such scrips, suspension of security is supposed to be a temporarily measure but it  take away totally liquidity. Temporary period is sometimes prolonged indefinite- we find scrips suspended for more than ten years. Frequent changes in circuit filters (upper and lower limits for price fluctuations allowed) also hamper trading opportunities and causes reduced liquidity. Many promoters seem to have adopted practice of non compliance of listing agreement leading to suspension and then delisting of securities- more than one thousand companies have been delisted for such reasons. All these causes loss to investors and non else. The Stock Exchange must work in more forward looking, proactive and responsible manner, must take timely actions, to protect interest of investors so that confidence in stock exchange is maintained and improved and one is not left to wonder whether stock exchange authorities also act in collusion with dishonest promoters and operator.   

Listing agreement a misnomer:

Listing agreement is an agreement between stock exchange and the company or other organization whose security is listed on stock exchange. In the present days listing agreement should in fact be called "CONDITIONS OF LISTING AND ITS CONTINUITY", because it is governed by SEBI and SEBI can direct the stock exchange any time to change terms and conditions of listing agreement. We find frequent changes made by SEBI in listing agreement. Therefore, it is misnomer to describe it as listing agreement.  

Failure to comply listing requirements and consequences:

Many times companies fails to comply with requirements of listing agreement with Stock Exchange at which its securities are listed. Sometimes such failure is due to bona fide reasons and reasons and situation beyond control of the management of company. However, there are also cases of promoters who adopted practice of raising money from public by issue of prospectus, red herring prospectus and successful IPO and then just forgot investors and deliberately did not comply with requirements of listing agreement and meeting expectations of investors. Some companies adopted route of non compliance, nonpayment of even listing fees and that lead to stock exchange firstly suspending trading of securities of such companies and then delisting those securities. We also find that there are several companies who are doing good business yet got delisted by adopting such unfair practices. For example, Shree Raj Tour and Travels Ltd. who is doing good business but by adopting such practices got delisted and has not send even any annual report after than  it issued shares by prospectus at par, then right issue at premium.  The company has not sent any annual report during last more than fifteen years, and even Registered letters sent to company by shareholders did not yield any result. The BSE has expressed no responsibility as the shares are now not listed.

Delayed and improper actions by stock exchanges: 

The purpose of stock exchange is to facilitate trading in securities listed on it. However, many actions of Stock Exchange goes against the vital purpose of listing. For example, suspension of trading, reducing or fixing arbitrary circuit filters (range within which price can move), shifting to "Z" category etc. When there is suspension, there cannot be trading, when low circuit filter is fixed, a reasonable price cannot be arrived due to upper and lower limits. There may not be seller even at the maximum price allowed and there may not be buyer at the minimum price allowed.

Surveillance measures in harmful manner:

Different type of measures for the avowed purpose of investor protection is taken in name of surveillance. This is supposed to ensure compliances and regularity and to penalize or create discipline amongst defaulting companies, promoters, stock operators etc. However, generally it is found that the most sufferers are investors - particularly small investors. As timely action is not taken, defaults are allowed to be accumulated and carried for prolonged period, defaults are not regularly and widely published and then suddenly stern action is taken causing great loss to small investors.

1511 suspended companies at BSE as on 16.04.2010:

In the table attached with this article, alphabet (A-Z) wise number of companies whose shares are suspended on BSE as on 16.04.2010 is given with illustrative link of BSE to see detailed list of companies and date with effect from which such shares are suspended. For example http://bseindia.com/about/datal/suspend.asp?aipha=A  ,

http://bseindia.com/about/datal/suspend.asp?aipha=B 

You can get list of companies with say C and D  by changing alphabet C  or D in the above links.

Number of companies suspended by BSE for defaults committed by companies.

The suspension is continuing in many cases even for more than ten years. Number of companies suspended as on 16.04.2010 is 1511. This is besides a large number of companies already delisted after keeping them suspended for a very long period.

Defaults by companies and the management:

Many times companies default in making payment of listing fees, filing and publishing results (quarterly, half yearly or yearly), filing other documents, not informing stock exchanges about material events,  management and other associated people indulge in insider trading etc.

As a result of such defaults there may be non-compliance / irregularities or default of legal and contractual requirement. Company and its management makes the default. Generally there is no fault by investor's - particularly small investors 

Defaults by brokers and operators:

Some time some defaults in the area of trading activity may be made by some brokers and other operators in the stock exchanges with or without connivance of the company and its management or some big investors. 

Actions by stock exchanges leading to illiquidity of shares: 

Stock exchanges take actions with a view to regularize the things or to create discipline. Some types of actions are as follows:

Temporary suspension of trading in scrip

Shifting scrip from better group to inferior group e.g. from A group to B1 or B1 to B2 or  B1  /  B2 to Z group etc.

Allowing trade -to- trade dealing.

           4.    De-listing.

In case of suspension of trading and de-listing trading comes to a halt. Big investors, brokers and operators (may be some persons associated with stock exchange authorities as well) and many times management people who are well aware of such likely events take steps beforehand and book profit before such action is announced. Small investors are taken by surprise as one fine morning they find that their scrip which was appreciating for last few days / months have suddenly been suspended or de-listed and now they cannot sell them and book profit.   

When scrips are shifted to an inferior group say from B1 to B2 or to Z group trading volumes suddenly falls and price also falls sharply and suddenly. This is because many brokers do not even place orders for buying and selling many scrips from B2 group and all scrips from Z group. As a result prices of these scrips falls suddenly and considerably. 

For example vide a press release issued on 7th December, 2004 the Bombay Stock Exchange announced that trading in  158 scrips will be suspended  with effect from 21st December, 2004, because the companies have not complied with clause 35 or 51 of the listing agreement. Thereafter on around 17th December, 2004, (date not mentioned in press release on web site)  the BSE has issued another press release that out of 158 companies 55 companies have, in the meanwhile, complied with the requirements and therefore, trading in the shares of those companies will not be suspended. Thus, in effect 103 scrips were suspended for trading from 21st December, 2004. May of these companies are still suspended.

It was noticed that in many such scrips there was trading in large volumes in some of these scrips. The people who were aware of suspension, might have jacked up the price and then sold substantial quantity in the market. Similarly the people who were aware that company will comply with and trading will not be suspended may have taken advantages of buying at low price when prices fell on announcement of suspension. Similarly the people who are aware that trading will be resumed soon, may purchase shares at low price just before suspension of trading, and sell after trading is again permitted.  

Another example is that during September, 2003 the Bombay Stock Exchange has shifted large number of scrips  to Z group / Trade to Trade. Many brokers are not allowing trading in such scrips. For example ICICI Bank's ICICI DIRECT .COM disabled trading in as many as 455 scrip's. w.e.f. 10.09.2003. This information was given by the ICICI Direct .com to clients by e-mail on 9.9.03.

The prices of these scrips have fallen by about 50-70 %. during 20-25 days. And top of that, trading was done only by few brokers and operators and therefore  small investors are not able to sell the scrips even at lower price. 

There are many more cases of such notices on regular basis. I have given old example, to illustrate the grave consequences of improper actions by Stock Exchange and not taking remedial measures on real time basis. 

On withdrawal of suspension:

Fro last few years it is noticed that BSE allow higher circuit filters or withdraw all circuit filters on the day trading is allowed to be restarted after a long suspension. This also provide opportunity to operators and management also who are in knowledge of such actions.

Frequent changes in circuit filters causes illiquidity:

We find that BSE changes circuit filters very frequently in many cases. It is also noticed that in many cases the circuit filters are touched rarely. Therefore, in fact there is no useful purpose served by changing such circuit filters. However, these actions only provide opportunity to manipulate the prices and gain out of such manipulations at cost of small investors. Let market forces determine reasonable price. It is noticed that once a scrip is rising or falling for few days, with large volume (or even small volume) of trading, the BSE changes circuit filters. We can notice notices from BSE almost on 2/3 of working days of BSE. This is not proper.  Sometimes circuit filter is fixed allowing + 20% or - 20% price fluctuation. Suddenly it is changed to +/- 5%. This takes small investors by shocking surprise.   

Once circuit filter is reduced to 5%, the sellers are unable to place offer to sale because the price even at maximum level allowed is not reasonable or it result into loss. Similarly a person who wants to buy shares may not be able to buy because the maximum price at which he can place order is not a price at which he may get a seller. 

Small investors suffer due to scrip becoming illiquid.

 The operators who were aware of such events had made profit by offloading shares in a rising market. The small investors who were not aware of such actions made purchases in such scrips in a rising market with a view to reduce their average price of old investments and also to book profit after some time. But unfortunate small investors had to face wrath of the action taken by stock Exchange.

Harmful for investors:

Generally these types of steps taken by stock exchange authorities are harmful to small investors. In fact many times management groups and operators create such situation so that stock exchanges take such steps. These people make certain hop hula in the market and off load their investments beforehand. After the scrip's are Z categorized, they again become active, cause fall in prices and then to accumulate such scrips at throw away prices. Let some time pass, the management group again regularize the things, again the scrip's are moved to B2 or B1 group again some concerted activity takes place prices are jacked-up and the operators off load such scrips. 

One may recall case of DSQ Software / DSQ Bio Tech. In those cases some time back (may be about 3-4 years) the stock exchange announced suspension of trading from a particular date. Thus, there was selling pressure and price of shares fell sharply. There was accumulation of scrip's by some group of people. Then there was an order from a court, keeping in abeyance decision of stock exchange to suspend trading meaning thereby that trading was allowed - the price appreciated on this news. In this case many people who were not aware of probable events lost money by selling shares at throw-away prices and the people who ware aware of probability of court order made money by buying at low rate and selling at higher rate.   

Thus, it is clear that such actions of stock exchanges are not in the interest of small investors. Rather it goes against them.

Faith in Stock Exchange and their duty to investor: 

Investors make investment in listed shares because they have faith and confidence in stock exchanges about protection of investors interest, maintaining liquidity and ensuring compliance by companies. Therefore, it is duty as well as moral obligation of the stock exchanges to take timely actions so that companies, promoters, stock brokers, operators act in regular manner and irregularities are not prolonged and carried over a long period of time. So that stern action like de-listing of scrip  is not needed. 

De-listing / suspension of trading for non-payment of listing fees: 

Many time stock exchanges adopt practice of temporarily suspending trading or de-listing of shares for non-payment of listing fees or other non-compliance with listing agreement or legal requirement. 

De-listing/ suspension of trading for any reason causes irreparable loss to investors. The company and promoters have raised funds. They are using the funds and running the company. Sooner or later the stock exchange shall be able to recover the dues (sometimes with interest). Now just by delayed payment or  nonpayment of listing fees they may get their scrips de-listed, causing panic and price erosion, which may enable them to garner scrips at throw-away price.     

To avoid such things the following is suggested:

The main reason for stern action to be taken is that timely action is not taken. Defaults are accumulated and then suddenly stern action is taken. The investors are also not made well aware of such things. Some suggestions are as follows:

Take advance-listing fees for three years before agreeing to list shares.

Keep two years fees as deposit.

Make contractual provision so that two years fees always remain as deposit and company pays fees  every year.

Charge says Rs.15000/- for investors protection fund before listing.

In case of non-payment due to exceptional circumstances investors protection fund may be temporarily used to pay listing fees on behalf of defaulting company.

In case a company is not paying listing fees for two years, a one year notice may be given to the share holders by the Stock Exchange that after one year the scrip's of the company may be de-listed due to non-payment of listing fees.

For other compliance timely action may be taken by stock exchanges and taking such action as may enforce compliance may be necessary.

(8) The names of defaulter and persistent defaulter companies may be published in widely circulated newspapers every quarter and continuously and boldly on website of stock exchanges.   

Stock exchanges must be held liable to compensate for loss:

Stock exchanges are charging hefty listing fees annually. The listing on Stock Exchange itself is a major factor for investor to make investment in a listed security.  Therefore, stock exchange should act in more responsible and forward looking manner.

Considering the role played by the stock exchanges in the economy stock exchanges should be answerable and  liable to compensate investors for their inaction over a long period of time and then stern action like de-listing of shares or suspension of trading or trade to trade trading etc. causing loss to investors. If someone seriously pursue the matter by way of a individual litigation or   public interest litigation it is likely that the stock exchanges may be held responsible for loss suffered by investors- particularly small investors for not taking action for considerable time and then suddenly taking stern action which does not affect the company or its management but adversely affect investors.

Liquidity and regular trading be arranged by stock exchanges:

The stock exchanges are charging hefty fees for listing and annual fees. Another charges are also collected from Broker- members. The S/E have sufficient funds so as to provide mechanism for adequate liquidity in markets. They must take investor friendly measures to provide liquidity in all scrips, and avoid measures which reduces liquidity of shares like different grouping, lower circuit filters. Suspension and de-listing.

In conclusion it can be said that for defaults of companies, investors should not suffer and the stock exchanges and SEBI must play active role in protecting interest of small investors who are generally not well aware of the insider lacking on part of companies.

ALPHABET WISE NUMBER OF  LISTED COMPANIES  WHOSE SECURITIES ARE SUSPENDED ON BOMBAY STOCK EXCHANGE AS ON 16.04.2010

Illustrative links for alphabet A and B http://bseindia.com/about/datal/suspend.asp?aipha=A  

http://bseindia.com/about/datal/suspend.asp?aipha=B   AND SO ON CHANGE ALPHA

The suspension is continuing in many cases for about ten years.

Alphabet	Number of companies suspended
A	132
B	58
C	71
D	56
E	41
F	19
G	93
H	51
I	60
J	29
K	73
L	21
M	124
N	55
O	31
P	98
Q	2
R	81
S	255
T	52
U	31
V	51
W	18
Y	6
Z	3
A-Z	1511