Sebi may tell exchanges to raise fees for trading in illiquid stocks
Sebi feels some of these illiquid stocks may be shell firms that could expose small investors to high risks
Mumbai: The Securities and Exchange Board of India (Sebi) has asked stock exchanges to raise transaction fees for trading in illiquid stocks in their recent discussions, two people aware of the matter said. The regulator feels some of these may be shell companies that could expose small investors to high risks, the people said on condition of anonymity.
Typically, any stock with an average daily turnover of less than Rs2 lakh for two previous quarters is termed illiquid. According to Mint research, there were at least 446 such firms in the past two quarters. In the December quarter, BSE listed 222 firms as illiquid.
“Illiquid stocks are extremely volatile and the risk of losing money is very high,” the first of the two persons cited above said. “If the transaction fee is higher than conventional stocks, people will not trade in such illiquid stocks unless they fully understand the risks. So, it is desirable that exchanges charge higher transaction fees for illiquid stocks,” added this person, who is a regulatory official.
“There was a proposal earlier that margins for illiquid stocks should be five times the normal margin charged for trading in ordinary liquid stocks. Additionally, there is a surveillance and compliance cost incurred by exchanges for keeping stocks listed. For illiquid companies, these costs are proportionately much higher because the number of transactions is less than liquid stocks. So, it makes absolute sense for an exchange to charge higher fees for illiquid stocks,” this person added.
Most illiquid stocks are listed on BSE Ltd, which is already charging more for trading in such stocks. However, the regulator feels even this isn’t enough.
Between fiscal years 2012 and 2017, BSE’s income from transaction charges rose from Rs29.4 crore to Rs110 crore, says a recent Nomura report. “The increase in transaction revenues in FY16, in spite of lower volumes, is due to the increase in transaction charges, especially for illiquid equity shares and a significant contribution of illiquid equity revenue in FY17, along with increased cash equity volumes,” the report said.
Illiquidity is found mostly in penny stocks, which trade at a very low price and have very low market capitalization. According to Mint Research, 134 out of 446 illiquid stocks in the past two quarters on BSE have a market capitalization of less than Rs10 crore.
Sebi, BSE and NSE did not respond to questions emailed on Friday.
“Sebi’s primary concern is to protect investors from penny stocks, which are mostly illiquid and may potentially be associated with so-called shell companies,” the first person cited above added.
Sebi has found that out of around 5,000-odd firms listed on exchanges, at least 1,000 appear to be illiquid penny stocks with few investors and infrequent trading.
BSE has increased charges in the illiquid securities in FY16 from Rs125 per Rs1 crore of trade to Rs10,000 per Rs1 crore of trade, taking advantage of the monopoly.
“This has led to a sharp jump in the illiquid cash equity revenue in FY17, which now contributes over 50% of the total cash equity transaction revenue. In addition to this, BSE has also started a super-exclusive group since July 2017 where it charges Rs1 lakh per Rs1 crore of transaction value, which has contributed another Rs4 crore in the second quarter of fiscal year 2018,” said Nomura.
Super-exclusive group includes 1,200-1,500 companies which are listed solely on BSE.
“Ideally, all exchanges should levy even higher charges for illiquid securities because of their higher chances of being associated with shell firms and exposing investors to higher risks of losing money,” added the first person, who is a regulatory official.
In August, Sebi imposed a partial trading ban on 331 companies identified as shell firms by the ministry of corporate affairs.
J.N. Gupta, managing director at Stakeholders Empowerment Services, a proxy advisory firm, supports higher fees for illiquid stocks and said higher charges should automatically raise an alarm to potential investors to seek a reason for such charges and take an informed decision, after assessing the risk. “Higher trading charges in illiquid securities are required to discourage common investors from entering dubious and potentially shell companies,” said Gupta.
Over financial year 2014 to 2017, BSE saw its earnings jumping by 29%. “While such a sharp uptick is surprising, a large part of this was led by the illiquid securities segment, which may be unsustainable given higher volatility in this area,”said the Nomura report.
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