If the listed entity remains not compliant for six months after suspension, then the trading will stop completely.
Recently, BSE and NSE said trading in nine stocks will be suspended. These companies, including well-known names like Gitanjali Gems, Amtek Auto, are under scanner for not complying with listing norms pertaining to submission of financial results.
The Modi government has been stringent with regards to shell companies and compliance with market nomrs. The corporate affairs ministry (MCA) and even the regulators — RBI and SEBI — have hinted that non-compliance will not be tolerated.
The number of cases has gone up where investors have suffered because of company management decisions. In some cases, oversize debt or overambitious projects destroyed companies' or even forced them into bankruptcy.
So what should investors do with such stocks?
Experts who Moneycontrol spoke to said companies which don't comply with regulations are better avoided.
"The framework (LODR - Listing Obligations and Disclosure Requirements - Regulations) was put in place as a stronger mechanism to check non-compliance of listing conditions, wherein exchanges will have powers to freeze promoter shareholding and even delist the shares of such defaulting companies," Prashanth Tapse, AVP Research, Mehta Equities told Moneycontrol.
The exchanges said if any company complies with the provisions of the LODR (Listing Obligations and Disclosure Requirements) Regulations on or before the date prescribed by the exchanges, the trading in its security will not be suspended.
The BSE asked companies to comply with regulations by September 4 and in case of NSE, the date is September 5.
Trap of Badly-run Companies
If someone is caught in such a trap then it would be difficult for one to exit as the value of shares either would be far below their buying price or they would have to keep hoping for improving performance which can give them better valuations.
"Exit as much as possible, these are companies which have corporate governance issues for long time," AK Prabhakar, Head of Research at IDBI Capital advised.
Arpit Jain, AVP, Arihant Capital Markets also said it is better to exit looking at the track record of the company, since once it is suspended it is difficult to exit. "However, investors will continue to remain as shareholders if they don't exit."
There is no way out from exchange platform once suspension is applicable, Jain said, adding client can sell through off-market route but it is subjective.
In the recent case, the exchanges have said that suspension will continue till the time they do not comply to the norms.
Re-trading - False Hopes?
So what should investors do once the stock starts trading again in case the company complies to rules?
Vineeta Sharma, Head of Research, Narnolia Financial Advisors, said as the companies which are getting suspended for non-compliance of Regulation 33 or non-payment of fine as prescribed raise doubts on management as well as financial capabilities of a company, it is advisable for investors to stay away from such companies even after trading is allowed again.
Arpit Jain said if stocks are allowed to trade again it is positive for short term since company has fulfilled all exchange compliance and it will be an opportunity for investors to exit who are stuck.
Case of Samruddhi Realty and Noble Polymers
With regard to Samruddhi Realty and Noble Polymers, the BSE said that both the firms have submitted the financial results but "not paid the applicable fines".
Also, the entire promoter shareholding of these firms have been frozen from August 17 till further notice, the exchanges said.
The Z Group
Suspension does not mean investors' shareholding is dead. After suspension, they can still offload their holding once a week but they have to queue up as exchanges can't hurt small investors.
"The exchange will allow trading after 15 days of suspension on 'Trade to Trade' basis in Z group only on the first trading day of every week for six months," said Vineeta Sharma.
The Z group includes companies which have failed to comply with listing requirements and/or have failed to resolve investor complaints and/or have not made the required arrangements with the depositories — CDSL and NSDL — for dematerialisation of their securities.
In Z group category, liquidity will be low, which can lead to higher selling pressure on these days, Hemang Jani said.
He further said if this (Z Group) doesn’t work, investor will have to wait till company becomes compliant and gets relisted (provided it doesn’t go bust till that time). "Such a move would try investor patience."
If a listed entity remains non-compliant for six months after suspension, then the trading will stop completely.
"If the non-compliant entity fails to adhere to rules within 6 months from the date of suspension, the process of compulsory delisting of the non-compliant listed company will take place which will be commenced by the stock exchanges," Vineeta said.In the case of complete delisting, she said, it is difficult to sell the shares as an investor will have to sell it privately. "In this case, the investor will have to approach the issuing company directly for sale of such shares."