PSU stocks: Go electronic now! or be ready to get junked

Shares of Coal India, NMDC, National Aluminium and BPCL could be dropped from the derivatives segment and may suffer a steep fall in prices if promoters in these companies do not hurry up and convert their holdings into dematerialised (electronic) form by 30 September. That will, in turn, badly affect, ordinary investors who hold shares in these companies.

A Sebi circular issued on Monday warned company promoters to ensure adherence to a guideline issued in June to convert their physical shareholdings into demat form by the end of this month or risk being thrown into the trade-for-trade (junk) segment. In addition, their trading bands could be reduced to 2 percent from 5 percent, the markets regulator said.

[caption id=“attachment_87906” align=“alignleft” width=“380” caption=“Converting physical shares into demat form can take up to a month. AFP”]  [/caption]

According to media reports, 27 of the Nifty’s 50 stocks were in breach of the regulation at the end of June. In nine of those companies, the promoters had their holdings entirely in physical certificates. Fifty-five of the top 100 companies on the BSE 100 and up to 1,000 companies on the NSE are believed to be non-compliant as well. Moreover, quite a few public-sector companies fall in these lists: HMT, Neyveli Lignite, RCF, NMDC and Coal India have more than 90 percent of their shares in physical form, for instance.

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It’s surprising how many promoters hold their shares in physical form in today’s electronic era, especially when trades in all A and B group shares on the BSE can only be settled with demat delivery. However, since promoters rarely trade a large proportion of their shares, it seems many have preferred to retain their shares the old-fashioned way.

Business Standard reported that some promoters living abroad had failed to open PAN (permanent account number) and demat accounts, while others had lost/misplaced their physical certificates. Family infighting with certain members resisting the conversion of these shares to electronic form has also added to the problems. Among international company promoters not having shares in demat form are Hindustan Lever and Glaxo, the report added.

Right now, there is a reasonable possibility that some companies could miss the September deadline. Converting physical shares into demat form can take up to a month, according to one market expert. With just 10 days to go, many companies are likely to miss their deadline.

So what are the implications of stocks falling in the T-group(trade-for-trade) stock ’trashbin'?

For a start, all stocks in these segments can only be traded in cash and there are restrictions on intra-day trading. That will lead to an evaporation of liquidity in the stock, not to mention a lowering of investor perception about the stock.

Fund managers tracking the index could be forced to dump stocks that fall into this segment, because they will find it difficult to trade in these stocks. When they do trade, the costs of pushing through a transaction could be considerably higher.

Institutional investors who follow the MSCI India index will also have to readjust their holdings; indeed, the index itself may have to be readjusted because the liquidity of the index’s constituents is taken into consideration while including them.

Retail investors will also suffer because they will find it difficult to sell/buy these stocks.