Is OTC market a ploy to let dishonest sponsors off the hook?
Wednesday, 3 June 2009
Shamsul Huq Zahid
The Securities and Exchange Commission (SEC) with a view to protecting the 'interest' of the investors has asked the bourses to come up with a guideline to create an ' effective' Over-The- Counter (OTC) market and transfer the junk shares from the centralised exchanges to that market.
The recent unusual price hike of the stocks of the non-performing listed companies, placed in the most-hated 'Z' category, has apparently prompted the securities regulator to dump these stocks in the OTC market.
Actually, the OTC market is not, generally, meant for the dumping of the listed stocks. It is a market for trading of stocks, via a network of dealers, of small companies, which are unable to meet the listing requirements of stock exchanges.
The executive director of the SEC, while talking to newsmen at the end of a meeting held between the high officials of the Commission and the country's two bourses last Monday, claimed that placement of junk shares in the OTC market would protect the investors' interest.
How the SEC can protect the interest of the investors by transferring as many 83 Z-category companies to the OTC market is really difficult to understand.
The bourses cannot transfer stocks of the listed companies to OTC market. This can only be done through de-listing, a move that would be greeted by the sponsors of these non-performing companies gleefully. The bourses, actually, would formally let many unscrupulous sponsors off the hook. Once these companies are de-listed and transferred to OTC market, their sponsors would be relieved of the hassles of answering queries from the regulator or paying fines or facing legal actions.
Moreover, investors who have investments worth millions in these junk shares would be left with no opportunity of getting back even a fraction of their money. For, the prospect of trading in the OTC market, if the experience of the Chittagong Stock Exchange (CSE) is any guide, appears to be bleak. The CSE, in line with the SEC rules made effective in 2001, introduced an OTC market and the Commission, according to a report published in the FE last Tuesday, allowed trading of stocks of four de-listed companies. But since introduction of the market, not a single share was traded.
The SEC move to introduce the OTC market, maybe, aimed at protecting the investors who easily fall prey to rumours and invest in junk shares. But such a development has nothing to do with the trading of junk shares in the main bourses. Rather, it is a gross manifestation of failure on the part of the regulator and the bourses in monitoring and disciplining the market. Rumours are not confined alone to the trading of 'Z' category shares. The phenomenon seems to be more prominent in the case of ' A' category shares. Many investors have already lost a major chunk of their investments in highly over-priced blue chips.
While advocating for sending the junk shares to OTC market, the SEC owes answers to a couple of questions from the investors: How can more than 30 per cent of the listed companies turn junk? How far it was true to its role as a regulator while granting permission to these companies to float initial public offerings (IPOs)?
A company, listed or unlisted, may face problems, financial or otherwise, and become sick. This is quite a natural phenomenon. But does not it appear rather strange if many listed companies become sick soon after raising money from the investors through the floatation of IPOs? There are many companies placed on the list of 'Z' category companies that had started reporting losses soon after their listing with the bourses. The SEC could have easily detected anomalies in the IPO applications, had it been serious about its duties and responsibilities. Besides, instances are there where sponsors of 'Z' category companies managed permission from the SEC to float new IPOs for other issues that, too, did not take too long a time to become non-performing.
Many listed companies have gone out of operation. Some of those even leased or rented out their premises to others. Still their stocks are being traded in the bourses. On dull trading days, a small band of investors are found to engage themselves in a sort of gambling over these stocks.
The SEC instead of asking the bourses to send the non-performing companies to the OTC market should do in what is proper on its part. It should bring about necessary changes in the securities laws and rules to punish the sponsors of the rogue listed-companies and take over companies and the personal assets of the sponsors of the companies, if necessary.
The SEC has to demonstrate that none can get away with money raised through IPOs that are full of rosy promises of high returns on investments. If banks can foreclose assets and drag the delinquent defaulters to courts, why should SEC having all the regulatory powers fall behind?
The Securities and Exchange Commission (SEC) with a view to protecting the 'interest' of the investors has asked the bourses to come up with a guideline to create an ' effective' Over-The- Counter (OTC) market and transfer the junk shares from the centralised exchanges to that market.
The recent unusual price hike of the stocks of the non-performing listed companies, placed in the most-hated 'Z' category, has apparently prompted the securities regulator to dump these stocks in the OTC market.
Actually, the OTC market is not, generally, meant for the dumping of the listed stocks. It is a market for trading of stocks, via a network of dealers, of small companies, which are unable to meet the listing requirements of stock exchanges.
The executive director of the SEC, while talking to newsmen at the end of a meeting held between the high officials of the Commission and the country's two bourses last Monday, claimed that placement of junk shares in the OTC market would protect the investors' interest.
How the SEC can protect the interest of the investors by transferring as many 83 Z-category companies to the OTC market is really difficult to understand.
The bourses cannot transfer stocks of the listed companies to OTC market. This can only be done through de-listing, a move that would be greeted by the sponsors of these non-performing companies gleefully. The bourses, actually, would formally let many unscrupulous sponsors off the hook. Once these companies are de-listed and transferred to OTC market, their sponsors would be relieved of the hassles of answering queries from the regulator or paying fines or facing legal actions.
Moreover, investors who have investments worth millions in these junk shares would be left with no opportunity of getting back even a fraction of their money. For, the prospect of trading in the OTC market, if the experience of the Chittagong Stock Exchange (CSE) is any guide, appears to be bleak. The CSE, in line with the SEC rules made effective in 2001, introduced an OTC market and the Commission, according to a report published in the FE last Tuesday, allowed trading of stocks of four de-listed companies. But since introduction of the market, not a single share was traded.
The SEC move to introduce the OTC market, maybe, aimed at protecting the investors who easily fall prey to rumours and invest in junk shares. But such a development has nothing to do with the trading of junk shares in the main bourses. Rather, it is a gross manifestation of failure on the part of the regulator and the bourses in monitoring and disciplining the market. Rumours are not confined alone to the trading of 'Z' category shares. The phenomenon seems to be more prominent in the case of ' A' category shares. Many investors have already lost a major chunk of their investments in highly over-priced blue chips.
While advocating for sending the junk shares to OTC market, the SEC owes answers to a couple of questions from the investors: How can more than 30 per cent of the listed companies turn junk? How far it was true to its role as a regulator while granting permission to these companies to float initial public offerings (IPOs)?
A company, listed or unlisted, may face problems, financial or otherwise, and become sick. This is quite a natural phenomenon. But does not it appear rather strange if many listed companies become sick soon after raising money from the investors through the floatation of IPOs? There are many companies placed on the list of 'Z' category companies that had started reporting losses soon after their listing with the bourses. The SEC could have easily detected anomalies in the IPO applications, had it been serious about its duties and responsibilities. Besides, instances are there where sponsors of 'Z' category companies managed permission from the SEC to float new IPOs for other issues that, too, did not take too long a time to become non-performing.
Many listed companies have gone out of operation. Some of those even leased or rented out their premises to others. Still their stocks are being traded in the bourses. On dull trading days, a small band of investors are found to engage themselves in a sort of gambling over these stocks.
The SEC instead of asking the bourses to send the non-performing companies to the OTC market should do in what is proper on its part. It should bring about necessary changes in the securities laws and rules to punish the sponsors of the rogue listed-companies and take over companies and the personal assets of the sponsors of the companies, if necessary.
The SEC has to demonstrate that none can get away with money raised through IPOs that are full of rosy promises of high returns on investments. If banks can foreclose assets and drag the delinquent defaulters to courts, why should SEC having all the regulatory powers fall behind?