Orchid’s 7700% stock surge to face reality check

A shortage of shares has helped drive a surge of almost 7,700 per cent in Orchid Pharma Ltd over the past seven months. Now it looks poised to end.

New owners have to divest part of their stake of about 98 per cent in the firm, which re-listed in early November after emerging from bankruptcy. That's to comply with a regulation that requires the new owners— n this case Dhanuka Laboratories Ltd—to boost the minimum public float to 10 per cent over the next few months.

Orchid is among a handful of companies to post meteoric gains after exiting bankruptcy proceedings. Such rallies could pose considerable risks for investors, as those firms typically don't have good fundamentals, according to some market watchers.

In a bid to limit such occurrences in future, the securities regulator in December decided to reduce to 12 months the period such firms have to meet the minimum freefloat requirement, down from 18 months earlier.

"It's not really investment, I call it fun and excitement," said Ajay Srivastava, MD of New Delhi-based consultancy Dimensions Consulting Pvt Ltd. While trading such stocks is an "adrenaline rush," the share sale by founders will force the valuation to likely become more realistic, he said.

Dhanuka won the Orchid stake after a threeyear legal tussle. Creditors got 1 per cent in the restructuring, with another 1 per cent going to existing shareholders. Apart from working to boost the public holding, Orchid's board is also evaluating a proposal to merge the unlisted Dhanuka Laboratories with the company, according to an earnings statement released on May 22.

With about 99 per cent locked in with founders and lenders, barely about 2,000 Orchid shares have been traded on an average per day. But those precious few had, until recently, always found willing investors— with the stock rising to the daily limit about 100 times since November.

Orchid's shares ended at Rs 1,411.70 on Thursday. They had surged to as high as Rs 2,680 in early April from Rs 18 on Nov. 3.