Reviving Fortunes

Sowmya Kamath   Delhi     Print Edition: December 2011

If you own illiquid shares which you are not able to sell in the open market, don't worry. Several companies, such as 3A Capital Services, Kajaria Securities and Finance and Abhishek Securities, buy such shares.

However, there's a catch. Because there is no exchange for such shares, the price is arrived at by the buyer companies and is usually 40-50 per cent less than the valuation of companies in the same business that are listed. "The parameters are the same as that used to value a listed company. The only thing is that the value of unlisted or suspended company is 40-50 per cent less than a listed company in the same business," says Rajan Shah, chairman and managing director, 3A Capital Services.

The price is at times negotiable. "Generally, the scope of price negotiation is up to 10 per cent, but may depend on the stock," says Shah.

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Market conditions also play a part. If stock prices of listed peer companies fall, the unlisted ones also see erosion in value. If the market breadth is weak, overall prices will be low. "It depends on demand and supply. All the financials aspects are taken into consideration," says Sandip Ginodia of Abhishek Securities.

Shares become illiquid or non-tradable if their trading is suspended by stock exchanges or there are very few investors interested in them. Normally, volumes give a hint if a stock is likely to be in the illiquid category. Several listed shares see volumes of only one share or 10 shares in a day, which means if you hold more than this, you cannot offload your holding.

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Shares traded on regional stock exchanges became illiquid due to lack of trading on these exchanges after the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) spread operations at the national level.

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Now, if a security is not listed and is illiquid, why is there a market for it? The answer is returns over long periods.

Kamal Kant Mishra, a New Delhi-based investor who buys such securities, says returns are attractive but risk is 100 per cent. "There are no fixed prices. The word is patience. You have to negotiate since there is no fixed price," he says.

Mishra says his investment in one such stock about 35 years ago has given him great returns. "I bought OMDC (Orissa Minerals Development Company) shares for Rs 2.50 per share. I sold them after the company listed," he says.

OMDC, one of the oldest iron ore mining companies in India, was listed on the Bombay Stock Exchange (BSE) in August 2010. It made a stellar debut, hitting the 5 per cent upper circuit at Rs 20,475 per share.

The stock rose to Rs 92,200 in 2010. Though the company was listed all this while on the Calcutta Stock Exchange, trading did not take off due to stringent margin requirements. The stock started trading actively only after listing on the BSE.

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Another example is Pilani Investment and Industries Corporation, an investment arm of the BK Birla group. The stock was listed on the Madhya Pradesh Stock Exchange where it was barely liquid. It was listed on BSE and NSE on October 26, 2011. On debut, it touched Rs 2,535 during the day. It was changing hands at Rs 1,500 per share in off-market transactions.

Several brokers who deal in non-listed securities cite OMDC as their best bet, though they had to hold the stock for a long period. This may be difficult for everybody.

"We provide a platform for people not willing to hold suspended or delisted shares," says Shah of 3A Capital.

OMDC and Pilani Investment were listed on regional exchanges. Since these exchanges were not working, their shares remained illiquid till they were listed on BSE and NSE.


"Sometimes you get good companies at low rates if you compare their EPS with listed counterparts."
Neeraj Kajaria
Owner, Kajaria Securities and Finance


Neeraj Kajaria, owner of Kajaria Securities and Finance, bought shares of Raunaq International, an engineering contracting firm, six months ago for Rs 150 a share. They are currently trading at Rs 350. The price to a large extent depends on how a company delivers in terms of earning per share, he adds.

Now, here are a few tips to make the most out of such shares. "You must evaluate the company and decide the price you are willing to pay, considering that you may have to hold the shares for an extended period," says Mishra.

To evaluate a company whose shares are not traded is tough. "I collect data from the internet, data base of stock exchanges, courts, the BIFR website and companies themselves," says Mishra.

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Dinesh Jain, based in Kolkata, says he prefers non-listed PSU firms. If not PSUs, he goes for companies which have strong brands or are subsidiaries of well-known listed firms. "I always buy with a 5-10 year horizon and go for companies expected to list on exchanges," he says.

"Sometimes you get good companies at low rates if you compare their earnings per share with their listed counterparts," says Kajaria of Kajaria Securities.

One must tread with caution since there is no regulated market and price for such shares. While the profit may be attractive, the loss may be devastating.

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