Sebi said to weigh minimum market cap of Rs10 crore for companies to stay listed

Mumbai: The Securities and Exchange Board of India (Sebi) plans to impose a limit on the minimum market capitalization for companies to remain listed in an effort to weed out so-called penny stocks, said two people aware of the development, including an official with the regulator.

Sebi is considering a free-float market capitalization of Rs10 crore for companies to remain listed, these people said. Free-float market cap is the value of publicly traded shares.

At present, there are no such criteria for continued stock liquidity in India. However, exchanges such as BSE and the National Stock Exchange stipulate a minimum market capitalization of Rs25 crore at the time of listing.

Sebi’s thinking is in line with international practices. For example, the New York Stock Exchange’s continued listing rules say that a company is not compliant if its average market capitalization over a 30-day trading period is less than $50 million.

Sebi has found that out of around 5,000 odd firms listed on exchanges, at least 1,000 appear to be penny stocks with only a few investors and infrequent trading, one of the two people cited earlier said on condition of anonymity.

Data from Capitaline showed that at the end of trading on Tuesday, there were at least 396 actively traded companies with a market capitalization of less than Rs10 crore.

“There are many companies whose business is only on paper. Such penny stocks do not make any economic sense, such companies should go out of the exchange space,” said this person. “Often investors come during IPOs (initial public offerings), expecting a lot from the company due to a market euphoria, but ultimately get trapped when the stock price goes down, trading activity decreases and liquidity dries up after listing. Limits on market cap, assets, profitability and mandating companies to meet certain standards may prevent this.”

A Sebi spokesperson did not respond to an email seeking comment.

The market regulator is likely to issue a consultation paper on this proposal in a few weeks, these people said. A committee under the regulator is already studying the issue and has made other suggestions apart from the market cap floor.

The group has recommended that companies maintain a minimum trading turnover as a proportion of the market cap, said the second of the two people, also on condition of anonymity. It has also recommended tighter net worth and profitability norms for companies.

At present, Sebi and stock exchange don’t stipulate a minimum net worth for companies whose equity is newly getting listed. The regulator is now planning to stipulate a minimum asset requirement of Rs25 crore for a company on a continuous basis to remain listed, said the first person.

“Apart from liquidity criteria, Sebi should also apply other criteria linked to performance of the company since market liquidity is something which is not in control of the company. There should be some compliance requirements in terms of growth, profitability, revenues etc. to judge the quality of the business and the future prospects of the company. In case a company fails to meet both liquidity and performance criterion, before delisting the company, an opportunity should be given to the company to present its case before the regulator,” said Sudhir Bassi, executive director at law firm Khaitan & Co.

The two persons cited above said existing listed firms will be given a year’s time to comply with the new liquidity and other listing criteria. Companies that fail to comply with the rules will be delisted from exchanges.

While delisting any company, Sebi has to ensure that one set of shareholders (i.e. promoters) is not burdened with providing an exit to other shareholders, Bassi said, adding that it would go against corporate democracy.