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

The Economic Times - - Smart -

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)

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