What You can do if You are Stuck in a ‘Shell’ Company
When the stocks are released from the ban list, it is possible investors will again warm up to them
ETMarkets.com: Market regulator Sebi’s crackdown on suspected ‘shell’ companies has led to abrupt suspension of trading in 331 stocks. With the list including MNCs such as SQS BFSI and well-recognised companies like JK Infra and Pincon, understandably investors are perplexed. The regulator has spoken, and it is now up to investors to be smart and practical about the challenge at hand.
NO FIRE SALE, PLEASE
Investors who hold shares in these 331 companies are left with little choice, at least for now. The sheer suddenness of this whole matter will take a toll on you, especially if the position is large. Since Sebi has capped the upward price movement at the level of the last-traded price for these stocks, any buyer will necessarily be compelled to make a deposit double the value of any trade. This means, buyers for your stocks will be few and far. Hence, you should ensure you do not engage in a fire sale of these stocks. Unless you are a professional speculator, you would have some fundamental reasons behind buying these stocks. Have those reasons changed? Are the companies fundamentally sound? Get those answers.
AVOID GREY MARKET
It is likely you could be approached by unscrupulous people about your ‘shell’ stock holdings. The legal trading platform is not available daily for these stocks because of the Sebi order. So, these securities will be trading once a month. Do not, and I repeat do not, engage in any grey market transaction for these stocks. It is likely that once trading resumes in these ‘shell-shocked’ stocks, some of them will go well below their intrinsic values. When investors are gripped with fear, often excessive selling happens.
When they are released from this list, it is probable that investors will again warm up to them. This is when some stocks, not all, may see a rally and regain some lost ground. However, there is no way available today that can help you understand which of these companies will be removed from this infamous list. All we know at this point is that the regulator based its decision on a letter from the ministry of corporate affairs identifying these 331 firms.
LESSONS TO BE LEARNT
The drastic action and bitter medicine from the markets regulator has obviously left investors with little choice right now. This episode brings to light why investors must assess the corporate governance parameters before investing in a stock. Let this be a lesson for the future as well.
(The author is CEO of Right Horizons)