It is the opposite in India. A misguided attempt to encourage retail equity investment through low entry barriers and insistence on a 40-city geographical distribution of Initial Public Offerings (IPOs) has, in fact, disempowered investors over the past decades. The BSEs 4,500-plus thinly traded scrips are a legacy of this policy.
Until a decade ago, stock exchanges ruthlessly delisted companies that failed to meet disclosure rules or pay listing fee. Sebi barred this practice because retail investors suffered the most due to such delisting. These days, there are plenty of examples, such as some steel companies, which traded below Re 1 but have recovered dramatically; or penny stocks that provided exit opportunities to long-term investors because someone ramped them up. The flip side of the latter opportunity is that a new set of investors are duped by the manipulators.
From the regulators perspective, this is a problem. The revival of steel companies aside, the legacy of untraded stocks is usually bad news. They are available for back-door listing through reverse mergers that side-step Sebis entry norms and initial scrutiny and are difficult to monitor and supervise. Since investors chafe at delisting, the regulator is considering the idea of asking companies to offer a fair exit value to investors (to be decided by a valuation committee) before compulsory delisting.
BSE has over 7,200 listed cos, but only 2,500 are actively traded
Until a decade ago, bourses would delist cos for not meeting disclosure norms
Sebi stopped this, as retail investors would suffer due to the delisting
When a rash of profitable MNCs sought to delist their shares, panicky investors forced the regulator to step in. There were complaints that the exit price offered by them wasnt good enough. Consequently, Sebi instituted a reverse-book building mechanism that allowed transparent price discovery by exiting shareholders though the automated stock exchange process.
Corporate India dislikes reverse book-building. Companies who used multiple open-offers to buy out retail investors are also irritated at the few who hang on to their shares even after the stock is delisted. They want Sebis exit price mechanism to help get rid of retail investors whenever a company chooses to go private. But these are a different kettle of fish from dormant companies that are thinly traded, be-cause there is negligible corporate growth and, hence, no investor interest, except during a bull market. It is these that the BSE wants to compulsorily delist; but they dont want to go and are unlikely to offer investors any exit pricefair or otherwiseand the regulator cannot make them pay.
Ultimately, Sebi may have to devise a mechanism such as the bulletin boards to transfer dormant and infrequently traded companies. These would only offer quotes and operate almost like unregulated markets (someone likened the US bulletin boards to unsupervised flea markets). Investors will trade at their own risk, but they would get some liquidity and an exit price when they want to sell. Are we prepared for such a situation
Else, can we come up with a better answer that does not hurt small investors and not burden the stock exchanges