Bhushan Steel, Jaypee share price rise: What are the risks of investing?

 Anand Adhikari   New Delhi     Last Updated: January 9, 2018  | 19:07 IST
Bhushan Steel, Jaypee share price rise: What are the risks of investing?

In the last six months, many of the over-leveraged companies referred to the newly introduced bankruptcy code are witnessing a surge in their share prices on the stock exchanges. The share prices of Monnet Ispat, Bhushan Steel, Amtek Auto, Electrosteels, Jaypee Infrastech  etc have  witnessed a rise of  over 20-90 per cent from the lows in the last few months. The value of equity is technically zero of these companies because of high unsustainable debt. In fact, if these companies go into liquidation, equity shareholders are not going to get anything. Investors or speculators are investing in these companies anticipating a haircut by banks  and new promoters or bidders turning them around. Here are four reasons why investors should be cautious in  buying shares of these companies.  
   
Threat of delisting

There is a strong possibility of a new buyer going for a delisting of share from the stock exchanges. While the company has to give an exit offer to shareholders , the very news of delisting would depress the prices. And once delisted, there would be no liquidity  and also  it would be hard to know about the performance of the company.
 
Merger with a parent or group company

The corporate houses that are planning to buy  these companies can take a decision to merge the company with the existing strong company. First, the share swap ratio won't be attractive for shareholders and secondly, the chances of making some good return in the company post turnaround also won't be there.  
 
Share Cancellation

There is a strong possibility of  new promoter applying for share capital reduction with the NCLT.  Under the companies Act, the share capital can be reduced by trimming the number of shares or reducing the face value. Both ways, the value of shares would go down.
 
Possibility of differences amongst the new promoters and bidders

Many existing promoters or players are bidding along with global funds to make a bid for the company.  There is every possibility of differences amongst the new partners over the future direction of the company. The funds always have a short term view whereas strategic players or promoters have a longer term view of the business. This will destroy the wealth than creating wealth for the shareholders.

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