Illiquid stocks rise as HNIs, retail investors spurn small, midcaps

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Nov 9 2011, 07:59am hrs
The number of illiquid stocks, characterised by minimal trading activity, has more than doubled in the past one year, data available with the NSE shows. On the BSE, too, the number has touched a year high. Market participants attribute this to lacklustre participation from retail investors and high net worth individuals (HNIs) in small and mid-cap scrips in an uncertain market environment.

There may be several factors contributing to low trading volumes in these scrips. Retail investors staying away from the equity market is one of them, said Sudip Bandyopadhyay, managing director and CEO, Destimoney Securities. In weak market conditions, the share prices of many mid-and small-cap scrips tend to crash. Investors get into exit mode and prefer to hold cash. So trading volumes plummet and it becomes very difficult to find buyers for these scrips, pointed out another retail broker.

According to Girish Dev, director of Future Capital Securities, the majority of the scrips featured in the illiquid lists published by exchanges are run by a select group of operators.

While these operators routinely manipulate prices during a steady bull phase, it is not easy to do so when the sentiment is bearish as retail participation tends to be low,

he said.

The number of illiquid scrips has increased by 132% to 344 for the month of October from 148 in November last year, according to data available on the NSE website. On the BSE, the number has risen steadily risen this year to 2,449. The rise in the number of illiquid counters coincides with the fall in benchmark indices of around 16% in the same period. Cash volumes on the exchanges have also hovered near their historic lows touched in March earlier this year, signalling subdued retail interest.

Interestingly, the number of illiquid counters had similarly risen in late 2008 and early 2009, when the benchmark indices tanked in the aftermath of the global financial crisis. For instance, the number of illiquid scrips as per NSE data had peaked to 449 in February 2009.

Market regulator Sebi has directed the exchanges to draw up a list of illiquid securities based on criteria decided by Sebi, NSE and BSE. The list is reviewed monthly. Exchange websites have advised trading members to exercise additional due diligence while trading in these securities either on own account or on behalf of their clients.

Market participants too advise caution. It is easy for a few operators to manipulate and kick up or bring down the prices of these scrips. Their prices are often not reflective of the true value of the scrips, observed Bandyopadhyay.

Investors hoping to make a quick gain are lured into investing in these duds when the market sentiments are buoyant. Unfortunately, several get trapped and are unable to make an exit, added Dev.