The rise in prices KGN Industries and Sylph Technologies on the Bombay Stock Exchange (BSE) on their re-listing days has redefined the word "stratospheric". And highlighted some of the loopholes that stock market manipulators can still use.
The good news this time around is that smaller speculators have been saved the losses, usually incurred due to such low-volume, high-manipulation blips, according to experts.
Every time a stock price rises abnormally, it is the small speculator — a risk-embracing entity who takes a position on future price movements of a stock seeking huge gains — becomes victim of the designs of market manipulators. The latter generally involves an attempt to interfere with the operation of the market and conduct that attempts to mislead or deceive market participants.
Because he knows little but wants to run with sophisticated investors and relies only on tertiary information that flows to him through a hierarchy of intermediaries, the small speculator usually enters a stock near its peak. And hence, ends up the loser.
Small investors, on the other hand, buy into a stock usually for a longer period. "I don’t think small investor is affected in these kind of manipulation involving small companies," said Motilal Oswal, CMD, Motilal Oswal Securities.
In the case of KGN Industries, which is one of the 4,900 companies listed on the BSE, the stock price rose to an intra-day peak of Rs 55,000 per share. This represents a rise of more than 763 times its opening price. The share price of Sylph Technologies literally skyrocketed 99,900 per cent to hit an intra-day high of Rs 800 per share, from its previous close of Rs 0.80.
"Investors are not stupid. When something is unusually wrong, self-regulation is the first step they take," said Deena Mehta, managing director, Asit C Mehta Investment Intermediates and former president of BSE.
Both, KGN and Sylph, belong to Z-group on BSE, which are companies that failed to adhere to the norms specified in the listing agreement of the stock exchanges. The category was created so that investors will know that they are taking higher risk by investing in these shares.
Foreign and domestic institutional investors, high networth investors (HNIs) and seasoned investors do not invest in them.
On the issue of having or not having price bands (for indices it is called circuit-breaker) on stocks, Mehta is clear.
"Exchanges should have internal surveillance bands for new and re-listing of stocks. But we should not cut out options thinking of some mischief."
National stock exchange is using such a band at 20 per cent which keeps moving along with the price of the stock. This is more to avoid mis-pricing of stocks due to typing error or other mistakes. For new listings, merchant bankers can provide the base price level, but for re-listing that kind of a base is not available.
BSE has already stated that it was looking into the trading data of KGN and Sylph stocks to unravel malafide intentions or trades not done in normal course of business of the trader.
BSE also cancelled or reversed such trades in the past to protect small interests of small investors. "If we have circuit breakers (price bands) we could have avoided this embarrassing situation," said VK Sharma, head (research), Anagram Securities. "Persons involved in manipulation should be punished. Otherwise such things could keep repeating."