As a result of these circuit breakers, what should have been an exercise lasting only a few minutes has now extended to more than two weeks, and is still counting
In Coffee Day’s case, investors are clearly at sea about the full extent of indebtedness of the company
Coffee Day Enterprises Ltd had a market capitalization of ₹4,050 crore before news emerged that its founder V.G. Siddhartha had gone missing. At last count, the company’s market value dropped by nearly two-thirds to ₹1,393 crore.
But we still didn’t know if this is the true worth being ascribed to the company by traders and investors. Thanks to a strange regulation that disallows free price discovery for certain types of stocks, Coffee Day shares are allowed to fall only at a gradual rate each day by the country’s stock exchanges.
As a result of these circuit breakers, what should have been an exercise lasting only a few minutes has now extended to more than two weeks, and is still counting.
Note that when Ramalinga Raju revealed the fraud at Satyam Computer Services Ltd on 7 January 2009, the company’s market value had adjusted within minutes. This was because Satyam was part of an elite set of stocks on which derivatives trading was permitted, and so was free price discovery. The company’s shares fell to ₹40 on that day and largely traded in the ₹40-60 band for the next few months, before Tech Mahindra Ltd bought it for ₹58 per share.
At any rate, regardless of whether the markets get their valuations right or wrong, circuit filters also prevent investors from exiting positions during the most desperate times.
What’s more, a looming fear that a stock may be stuck at the lower end of the circuit filter for another session results in panic selling, exacerbating the fall.
In this backdrop, it is baffling that the Securities and Exchange Board of India hasn’t yet tweaked its rules that make an exception at least in cases such as Coffee Day, where material new information emerges. While regulators use tools such as circuit breakers to protect small investors from high volatility, they impede price discovery in such situations.
In Coffee Day’s case, investors are clearly at sea about the full extent of indebtedness of the company. While Coffee Day’s reported debt itself was very high at the end of fiscal year 2019, there were doubts whether there was more to it than meets the eye. When the company held a conference call with analysts to discuss the March quarter results, it was inundated with questions about the actual reduction in debt post the sale of its stake in Mindtree Ltd. The company said net debt had reduced to ₹2,400 crore. This seemed at odds with the net inflow of ₹2,100 crore from the sale and the existing debt of ₹3,750 crore.
On Wednesday, Coffee Day said in a filing to stock exchanges that it has signed a non-binding letter of intent to sell one of its real estate assets at a valuation of ₹2,600-3,000 crore. If the deal closes, perhaps traders may start seeing value in Coffee Day shares again, now that its market value has fallen to less than ₹1,400 crore.