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The plight of the small investor

The small investors are a much abused lot worldwide, perhaps nowhere more so than in a developing economy like India. The small investors are absolutely essential for the survival of a fairly under developed stock market like ours yet they are treated exactly like the politicians treat the voting public - by lip-service.

The laws of the land, sloth legal system or the legal agencies are definitely not helping the matter. How can they when they are part of the same system?

Take the example of "Open offers" as reported in the press.


Several small investors are stuck without exit due to indefinite delays in open offers announced by acquirers of companies such as Shree Rama Multi Tech and Marg Ltd. While Shree Rama investors have been waiting for seven years, the Marg open offer was announced in October 2011. Caught in legal disputes and regulatory directives, the investors are yet to get their promised exit. Even as the offers were stuck, the prices of these shares have plummeted, further diminishing the initiative of the acquirers. Marg shares ended Monday’s trade at Rs 31.20 a piece, nearly a third of its open offer price of Rs 91. Shree Rama Multi Tech has crashed from its offer price of Rs 18.60 a piece to Rs 5.90 at on Monday’s close.

Both companies have around 19,000 small shareholders, with holdings of less than Rs 1 lakh each, according to latest exchange filings.

The takeover regulations formulated by the Securities and Exchange Board of India (Sebi) require an acquirer who buys shares in a particular company above prescribed limits, to make an open offer to buy a certain amount of shares from the public. Email questionnaires and repeated attempts to reach company officials did not elicit any response.

Market watchers said the Shree Rama case dates back to 2002, when Nirma had bought convertible notes of the former. In 2005, Nirma came to own 24.25 per cent after the company defaulted. It also announced an open offer. But it later wanted to revise the offer as the market price of the stock was much below the conversion price. The acquirers, then wanted to withdraw the open offer obligations, after alleging siphoning off of funds by the promoters.

On June 5, 2008, SAT upheld the Sebi order, saying Nirma Industries and Nirma Chemical Works tried to wriggle out of a bad bargain, not permissible under Regulation 27(1)(d) of the takeover code. Later, in November 2008, Nirma Group moved the Supreme Court.

In the case of Marg Limited the market regulator, Sebi, ordered the company to raise the open offer price four times, as the company was repeatedly involved in takeover code violations. Sebi asked the company to revise the open offer proposed at Rs 91 a share to around Rs 340. According to the merchant banker, the company has moved the Securities Appellate Tribunal .

The above examples like many others are typical of our financial system. All are trying to or doing their job. It is unfortunate that some investors are suffering but cannot be helped. It is the system. Right?

Similarly with the issue of "Vanishing Companies" or companies suspended by the exchanges elaborated elsewhere in this blog. The companies are being suspended due to "non-compliance with the listing agreement". The exchanges cannot be faulted here as they have followed the rules. But the tragedy is that though suspension from the bourses don’t affect the companies’ operations, it had an adverse impact on its public shareholders, as they cannot sell shares on the exchange until the suspension was revoked by the exchange or Sebi.

This is a classic catch 22. Heads I win, tails you lose.


We talk of bringing back investor confidence in the light of fluctuating stock markets. But the point that is missed or ignored is not the ups and downs of the market which erodes confidence, rather its the genuine feeling of being repeatedly manipulated which is hurting the investors most. While over the years, many laws have been introduced to bring some much needed stability to the system along with creation and empowerment of SEBI, the job of bringing the much needed confidence back is still a dream to be achieved some day. Even SEBI is perceived as a watchdog which sleeps at its job and wakes up only when it cannot be avoided. In SEBI's defence, the country's law and the sloth legal process is a huge obstacle.

Obviously, laws or the system is like this simply because it suits some people. Equality before law sounds so nice but if we are all equal then we should all be driving Jaguars. That is not possible. Frankly, corruption is everywhere and in every country and I am sure had been there since society was formed. But it is the hallmark of the third world that it takes the form of national characteristics.

Articles referred to:
http://www.business-standard.com/article/markets/small-investors-stuck-as-open-offers-in-limbo-113021800848_1.html
http://www.business-standard.com/article/markets/suspended-firms-hc-notices-to-sebi-bourses-113022000577_1.html

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