Need for more transparency in relistings: Experts

Basu: No we have discussed all this. I think SEBI had decided that there should be no circuit filters, then there were abuses of these kinds in the last major IPO bull market we had. But then SEBI came to a very interesting sort of a conclusion that by and large a large number of companies coming to the market either through relisting or even IPO are reasonably good companies; we are not seeing this kind of IPO abuse we saw in 1994-1995.

So these kinds of cases would be very few and far. Now that is the operating part - to track them down. There is no statement from BSE except the fact that they have taken a proactive measure. So you can have any plan, but if you don't implement it fully the way then what is the point of having that plan. The point is very simple that who traded in those shares is very easy to track. Last time I was here, I said everything is electronic, there are paper trails, NSE comes down like a tonne of bricks, income tax can be all over you. Everybody has all the information, everything in the banking channels is through electronic means but where is the action.

Q: You want to come in on that?

Mehta: In case of new listings when we design, I would look at the solution in three parts. If we look at a very quick fix solution, the exchange surveillance system is designed in a manner that is possible to have a mock circuit filter. If a script goes above a certain point then an alert is given to the surveillance department of the exchange. In case of all these new listings and relistings, maybe these kind of absolute monitoring and surveillance would be necessary and if need be trading could be halted for about half an hour. It can be restarted because in normal circuit filters the reference point is the previous day's close.

The current system is not geared for that but definitely it gives alerts. The broker can be cautioned and the trading can be halted for about half an hour, let the market come to know that something unusual is happening and then it can be resumed.

On one side what Debashis Basu talked about is that misuse of circuit filter, which can be avoided because the reading will restart. The second point is that the investor will have to be very cautious when scripts behave crazily like this. We have had cases where though the share was in T2T people have gone in and sold it not realizing it is a T2T share, just because the share opened at Rs 80 and then went upto Rs 600-700 to Rs 1,200, people just went and sold. So second point is from the point of view of the investor that caution is required.

Third I would say which I have been very strongly advocating and that is relisting of shares after a big gap of several years, there have been instances where there is lot of trading, which happens in the case of listed companies - somebody who doesn't want to maybe get a Rs 20 crore capital, he will buy a company which is listed with a smaller capital and make an entry into the market. So these kind of cases are where we see this kind of crazy movement where there are a set of people who know something cooking in this company, but others don't know.

So while relisting shares, with some time cooling period on the relisting and change in management and transparency in the relisting, this kind of behaviour can be avoided. So we have to tackle it at three stages; firstly at the exchange level, second is the investors themselves and third is you are again at the exchange level where we try to see to it that misuse of this relisting is not done.

Q: What would be your formula? Would it be advisable to put a structure in place saying that above 30% movement on day one, the exchanges get alerted and start the surveillance or case-by-case where you don't put up circuit filter, but you just know which companies are suspect and you do extra diligence on those?

Basu: There was a fascinating story just about two months ago. In February, English India Clays was quoted at Rs 1,690; it got listed, it did some corporate restructuring, sold some divisions and demerged, finally it listed at Rs 189. How did that happen? Nobody in the media wrote about it. It just happens; Moneylife consistently followed that thing because we talked about that stock and when it relisted at Rs 189 everybody was asking as what is that stock that you talked about. We found out that there is a formula. 

In this case BSE calculated that formula and listing price to be wrong. So it got listed at Rs 189, 90% down. When asked, the Exchange Authorities said the correct price maybe Rs 1,800. "If the stock for 20 days consecutively hit circuit filter at 5%, it will go to that price" this was the answer given to us by the Exchange Authorities.

Deena Mehta pointed out perfectly theoretical points, very valid. But if this is what is happening to the implementation on the ground, what formula are you talking about? Today even media plays a very sensational role in all this. 

Most importantly make sure that if you have a formula, it is being implemented. As I said, 48 hours ago nobody from SEBI said anything and put pressure on the regulators.

Q: Do you think this is a problem that is becoming more specific to relistings rather than IPOs listing? And how do you see the promoter part of the role? Yesterday we were just speaking about one of these stocks to the promoter himself, who claimed that he had no idea of what was happening with his stocks and he was quite concerned.

Mehta: As I said we can give the benefit of doubt to the promoter that may be he doesn't know anything. Also traders have set up the system in such a manner that every blip of unusual movement they get a sense of and everybody wants to act on it. There is no thinking on what is the price required and they just trade on the prices, they don't look at the company, so these kind of things can happen.

But I'm sure when I talk about having a cooling period of half an hour and then allowing the market to find its levels,, at least on the first day we would arrive at a right kind of price, rather than waiting for 10-20 days for the circuit to work and come out. I think the lessons we learnt in that is that you reopen the market, allow the market to find its own level and that is the only way, where we will arrive at the correct pricing in shares.

So I think a mixture of good surveillance and caution and allowing the market also to operate without putting too many artificial barriers is the solution, of course there will be one or two cases where things would go.