Illiquid securities more than double amid Covid-19 crisis

Smaller firms find fewer takers; analysts advise retail investors to be wary of such stocks

An increasing number of listed companies, many with market capitalisation of less than ~10 crore, have seen their shares declared illiquid as trades dried up amid the Covid-19 pandemic.

A total of 423 stocks have been declared illiquid in the June quarter. The number was 340 in June 2019, and 223 in June 2018.

A stock is considered illiquid if the average daily value of shares changing hands is less than ~2 lakh over the previous six months, according to a note on the BSE website.

This excludes companies where t he value of all shares taken together (or market capitalisation) is at least ~10 crore. Companies paying dividends over t wo out of the last three years are excluded. Also excluded are firms that fulfil criteria on profitability, book value (the value of its assets after deducting the value of liabilities) and where majority owners (or promoters) haven’t pledged more than a fifth of their shares to borrow money from lenders in the last three months.

Such stocks are transferred to a periodic call auction mechanism. This allows buyers and sellers to better discover prices through the auction route, before the final orders are executed.

“For entry and exit of scrips in the call auction mechanism, a notice of two trading days shall be given to the market...periodic call auction sessions of one hour each shall be conducted throughout the trading hours with the first session starting at 9.30 am,” the Securities and Exchange Board of India’s circular on the matter says.

This development comes even as the number of retail investors has been on the rise in recent months, and they might need to be on their guard against getting stuck in illiquid securities, especially if they are new to the market, according to Alok C Churiwala, managing director at domestic brokerage firm Churiwala Securities. “It’s an avenue where they are bound to lose money,” he said.

The number of active clients has risen to 12 million, shows June data from the NSE. This represents an addition of over 1 million clients since March. Many are reportedly first-time investors who became active during the nationwide lockdown that was imposed to check the spread of Covid-19.

The average market capitalisation of illiquid stocks has been under ~4 crore, shows recent data. Churiwala believes investors should stick to the liquid names, where he believes multiple bargains still abound.

Uttam Bagri, chairman of the Bombay Stock Exchange Brokers’ Forum also sounded a note of caution for newbie investors. “(A) retail investor should always study the fundamentals, or take good quality investment advice before investing,” he said.

The warnings on investing in small, illiquid companies comes even as their larger peers have been struggling with earnings. Data for the fourth quarter of the financial year ending March 31, 2020 (Q4FY20) has been discouraging with a recover y still looking distant, according to analysts who have been tracking the numbers.

Even large companies that form part of the Nifty50 index are likely to see significant headwinds on earnings, according to brokerage firm Edelweiss S ecurities’ July 2020 ‘Q4FY20 Earnings Review’, authored by analysts Prateek Parekh, Aditya Narain, and Padmavati Udecha.

“Top -line growth for coverage universe remained weak...the more worrying aspect is the broad-based nature of slowdown, with large number of sectors reporting ... (top line)... contraction, despite a much lower deflationary impact this time around,” the report said.