Categories

10000 to 4crs in 18 months 1000rs to 50crs 300% returns 75% promoter holdings A 50 bagger A sureshot 5 bagger Analysis Another fraud? Auto ancillaries Bank sector Blind sell Brand plays Broking Bse Nse Buy calls cements Ceramics/tiles Counters I don't like Debt free businesses Delisting candidates demerger bets Disclosure- I own them Domestic consumption plays E-Commerce pick Education Exit at rallies Famous analysts Famous stocks FMCG Footwear future multibaggers Gems andJewellery Hidden gems High conviction ideas High dividend plays High potential small caps High ROE stocks Holding companies Hotel sector How they looted you.. Indian stock market Infrastructure sector Interesting Microcaps IT KPO Landbank plays largecap ideas Less than 5 PE stocks Liquor Logistics Market lessons Market outlook for 2013 and 2014 Market underperformers Meeting with the CEO Metals Monopoly businesses My 5 baggers My Favourite counters My paid stock recommendations My stock picking techniques nse bse tips Oil exploration Operator calls Paints Penny stock outlook penny stock updates Pharma sector Poultry stocks PSU Publicity freaks Real estate Renewable energy plays Safe bets Sell recommendations Share market Live shipping stocks short term call SOTP plays stock tips stock under 10rs Stocks to watch out for Strong bonus candidates Takeover candidates TATA product tea Textiles The 13 bagger The 45 bagger Trading companies Transformers Turnaround bets Tyres Uncertain/Risky business models Unique businesses

Search This Blog(Over 800 companies covered in the blog).

Please note

Note: The artciles are not research reports but assimilation of information available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I might have the dkiscussed companies in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments
.

Archives : Old artciles

Wednesday, July 30, 2008

Stay away from Z group stocks

The key criteria for selecting stocks for investment should be the quality of management and its adherence to corporate governance. What is the point in investing in companies that do not even bother to send annual reports to their shareholders?

Stock exchanges use various provisions in the listing agreement to regulate companies’ corporate governance practices. Stocks that fail to comply with the various provisions of the listing agreement are clubbed under various categories. The Bombay Stock Exchange (BSE), the largest stock exchange in terms of number of stocks listed, classifies such stocks into the Z group, and the trade-to-trade segment. It monitors these stocks on an ongoing basis.

Stocks that have not complied with or breached provisions of the listing agreement of the BSE are pushed into the Z group. Those stocks witnessing lot of volatility, suspicious trading pattern and high speculative interests are shifted to the trade-to-trade category.

The Z category was introduced by the BSE in July 1999. The governing board of the BSE came out with important amendments to the criteria for shifting stocks to the Z group in January 2002. The guidelines specify seven parameters for shifting stocks to the Z category. The exchange considers any three of the seven parameters of non-compliance for shifting a company to the Z group. The seven criteria are as follows:

Required notice of book closure and record dates (Listing Clause 15 & 16).
Yearly submission of annual reports (Listing Clause 31(1)(a)).
Quarterly submission of shareholding pattern (Listing Clause 35).
Payment of annual listing fees (Listing Clause 38).
Publication of audited / unaudited results on a quarterly basis (Listing Clause 41).
Redressal of investors’ complaints such as share transfers (Listing Clause 3, 12, 21).
Implementation of corporate governance, if applicable (Listing Clause 49).

Additionally, the exchange may shift certain companies to the Z group based on its discretion: companies that are fundamentally weak in terms of net worth, sales, market capitalization and profitability. Those companies that fail to make dematerialisation (demat) arrangement with both the depositories — Central Depository Services (CDSL) and National Security Depository (NSDL) — are also shifted to the Z group. However, as and when the company makes demat arrangements, the stock is shifted back to the original group after three months from compliance.

Companies in the Z group are reviewed on a quarterly basis by the governing board or the listing committee of the stock exchange. Besides, the surveillance department of the exchange has discretionary powers to add or remove companies from the Z group based on its own investigation or complaints filed by investors or any kind of suspicious trading pattern. The Investors’ Service Cell also has the powers to add or remove companies from the Z group. Not only this, the exchange can take into consideration any punitive actions taken by any regulatory authority against a company as basis for shifting the stock to the Z category.

How are investors affected when a stock is shifted to the Z or trade-to-trade category? First, such companies do not follow basic minimal corporate governance norms. Many of these companies do not even bother to submit annual report or shareholding pattern regularly. They may not even pay attention to investors’ complaints as regards to share transfer. Investing in such companies simply means buying a worthless piece of paper.

In the Z or trade-to-trade segment, selling or buying results in giving or taking delivery of shares at the ‘gross level’. Gross level means no intra-day netting off or squaring off is permitted. Thus, no investor can indulge in intra-day trading in such stocks. For instance, an investor buys 100 shares of stock ABC, shifted to either the Z or the trade-to-trade category, and further sells another 100 shares in the same trading session. End of the day, his purchase and sales would not be netted. The investor would need to give delivery of 100 shares against his sale transaction and would also need to pay for the purchase of 100 shares.

As a result, the price discovery mechanism of stocks shifted to the ‘Z’ group or trade-to-trade category is poor as volatility is high. The investor could find some of the stocks hitting upper circuit continuously for many days and, subsequently, may tumble down in a matter of a few trading sessions. No wonder the BSE specifies higher margin for trading in such stocks. Hence, institutional investors like mutual funds, insurance companies, and foreign institutional investors stay clear of such stocks. Thus, these stocks lack liquidity.

This is also reflected in trading activity. The average turnover of the Z group stocks is less than 1% compared with the overall turnover of the BSE. On 30 March 2007, the combined turnover of the Z and the trade-to-trade categories stood at a minuscule 0.52%. Though there are more than 7,500 listed companies, only around 2,600 stocks are actively traded, while the balance are in the Z group or illiquid or suspended from trading.

One of the obvious strategies for investors is to stay away from stocks belonging to the Z or trade-to-trade group. More importantly, investors should not fall prey to penny stocks. Penny stocks trade below their face or par value. Even the exchange’s trading terminal displays a pop-up caution message when an order for a stock in the Z or the trade-to-trade group is entered.


Regards,
ARUN
I can be reached at:arunanalyst@rediffmail.com

No comments:

Important Disclaimer&Privacy policy

This blog does not share personal information with third parties nor do we store any information about your visit to this blog other than to analyze and optimize your content and reading experience through the use of cookies.You can turn off the use of cookies at anytime by changing your specific browser settings.This privacy policy is subject to change without notice and was last updated on 20.3.2013. If you have any questions, feel free to contact me directly here: arunsharemarket@gmail.com Investment in equity shares has its own risks.Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that I consider reliable. I,however,do not vouch for the accuracy or the completeness thereof.This material is for personal information and am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.The stock price projections shown are not necessarily indicative of future price performance.The information herein, together with all estimates and forecasts, can change without notice.
 
x

Subscription to Arunthestocksguru

Enter your email address:

Delivered by FeedBurner