Something's rotten in small-cap scrip rally: Experts

When rational investors turned cautious even about the soundest company stocks amid the macroeconomic turbulence and headwinds -- soaring inflation, interest rates, costs of production, and the deteriorating exchange rate -- the stock market has entered into a low-cap frenzy.

Market experts believe the small-cap rallies are clearly reflecting the ongoing market manipulations and should be monitored by the regulators before it is too late.

Several hundred percent of price gains in weeks, or double digit gains in every alternate day is the face of the small-cap stocks nowadays in the bourses of Dhaka and Chattogram.

It gives the impression that small companies are shielded against all economic challenges, while analysts say the case is the opposite in real life and the market is playing small cap stocks blindfolded, a behaviour observed in casinos.

An example is the Apex Weaving and Finishing Mills, a sick textile company sinking into liabilities that returned to the Dhaka Stock Exchange's (DSE) small-cap platform later last year following its decade-long hibernation in the over the counter (OTC) market.

Once kicked-out from the trading board due to its continuous losses since 2009, the Tk39 crore paid-up capital company now discloses an accumulated loss of Tk153 crore and an annual loss of Tk17.6 crore. Also, the auditor in its latest report clearly discussed the fictitious assets, nonpayment of bank liabilities that suffocates the company leaving it without working capital.

The company itself disclosed that its factory's electricity and gas connections have been disconnected since May due to nonpayment of arrear bills and the factory was not operative.

Despite all these negatives, nothing stopped Apex Weaving shares soaring to Tk45 on Sunday, from Tk5.6 in mid-March on the DSE small-cap trading board.  

Apex Weaving is merely an example. Over a dozen sick firms are showing such unexplainable rallies in their stock prices regardless if they are trading in the small cap platform or still remain in the main market.

Imam Button Industries, a decades-long money-loser, has stopped its production in 2020 amid no sales and is yet to come back in production. Its shares soared over 440% in the last six months and 280% in the last three months to Tk131 on Thursday, which is 27 times higher than its net asset value per share while its operations are synonymous with losing money.

Auditors have been expressing their concerns about whether the firms can survive.

"I do not understand who buys such shares at so high prices" said Dr A B Mirza Azizul Islam, former chairman of the securities regulator.

"Such rallies are unreasonable," added Islam who also served the former caretaker government as an advisor.

The streets of Motijheel and various stock investors' social media pages are flooded with criticism of the Bangladesh Securities and Exchange Commission (BSEC) and the DSE for overlooking the abnormal and suspicious rallies in small-cap companies.

Many are warning of big scams within the small-cap stock rallies, foreseeing the average investors burning their fingers in the allegedly pump and dump schemes.

Mirza Azizul Islam does not think the regulators should dictate prices in the market.

"But the regulators must take prompt actions if the market players act in collusion," he said.

Faruq Ahmad Siddiqi, another former chairman of the BSEC, said whatever is going on with the small-cap stocks, the regulator should not overlook the market movement and blame investors' speculation.

"It is very likely that there are price manipulations that are in violation of securities rules," he added.

A good initiative abused in front of the eyes of regulators

Small-caps resurfaced as trendy in the market during the pandemic as soon as the BSEC moved to bring the defunct and sick listed companies back to track, either reequipping them with fresh capital or new directors, being they were trading in the main platform of the bourses or hibernating in the OTC platforms.

The BSEC in the late 2020 initiated its move to determine the fate of delisted firms left in the OTC platform for a decade— either placing them in the nascent small cap board if they mean revival in business and comply with the securities law, or sending them to the upcoming alternative trading board until they mean revival, or allowing the companies to go private if entrepreneurs buy out all the public shares.

Also some OTC firms like Sonali Paper, BD Monospool, Paper Processing, and Monno Fabrics made their way to the main board securing regulatory approvals.

Besides the OTC-returnees, the bourses' main trading boards also have around five dozen firms that have less than Tk30 crore in paid-up capital, a threshold set by the BSEC to distinguish small cap and other firms.  

Of the 13 firms in the DSE small-cap board right now, Himadri, Apex Weaving, Bengal Biscuits and Wonderland Toys are back from the OTC, while nine small firms entered through fresh qualified investors offers (QIO) where only the registered institutional investors and high net worth individuals can invest.

"Small-cap board is an example of how a good initiative turns into a tool for vested quarters," said Richard D' Rozario, the president of DSE Brokers' Association (DBA).

The revival of the defunct or struggling delisted firms was a good initiative for the economy, the stock market itself and of course for the shareholders of the firms, he said.

Across the world, having good investors on board, many sick companies turn around in business and even thrive. This is very possible here in Bangladesh too.

But the problem appears to be that there might be cases of faking the turnaround stories or severely lacking sustainable value creation capabilities, feared the leader of the stockbrokers.

"It is the regulators' duty to monitor if anyone abuses their good initiatives," Rozario added.

In china, SME platform helped flourish hundreds of small firms and their due diligence before onboarding a firm is enormous.

"The Chinese SME firm that supplies electrical goods to one of my family businesses applied for listing in the Chinese small cap platform and the Chinese stock exchange officials visited Bangladesh to interview us and the bankers concerned to cross check the export information the firm submitted," said Rozario.

"I doubt our stock exchanges and regulators have performed sufficient due diligence to allow some small cap firms onboard," he added.

"The market is for wealth creation, rallies are desired by everyone unless it lacks a true business case, investment case."

If someone manipulates the good initiatives for illegal gains, it is the responsibility of the stock exchanges and the BSEC to monitor the actions.   

Echoing Rozario, veteran stockbroker Shakil Rizvi, a director of DSE said, everywhere, there would be something to allure the average people that would ruin them ultimately.

"It is your money and the primary responsibility is yours to protect it."

The worst part is, each of the abnormal rallies involve advance insider knowledge among the market players regarding what the regulator will do, what the company will do, Rizvi said.

"Six-seven months ago, some young guys told me to buy some X, Y, Z small-cap scrips explaining how their prices would increase dramatically and I rejected the idea considering the stocks as junk," said Rizvi.

"Now, they are the guru in the street and I am treated as a loser."

"Apparently, they all used inside information and have been attached to the cartels," he added.

Rozario said, if investors look at the previous junk rallies and the collapses ultimately, they would be taught not to be greedy.

A brokerage CEO, requesting anonymity, said what is going on in the SME platform and junk stocks in the name of low-cap advantage and revival stories, is happening under the eyes of the stock exchange and the regulator.

The regulator has surveillance tools, and it would not take any additional efforts to use them in small cap and junk scrips, he added.  

Low cap scrips have been chosen to be pushed higher, only because they need much less funds to control the price during a bearish phase of the market as a whole, the CEO explained to The Business Standard.

SME platform was calm when it was not allowing investors having less than Tk50 lakh buying scrips there, but as soon as it was lowered to Tk20 lakh earlier this year the insane game began.

BSEC Executive Director and spokesperson Rezaul Karim, however, denied any lack of monitoring or the popular allegation of facilitating the small cap rallies.

"The small-cap platform, pushing defunct or poorly performing firms for improvement--all have been for a good reason,"

Most importantly, the small cap platform is only for eligible wealthy investors who can afford taking risks, not for the hardworking small investors, he added.

Bourses and the regulator are monitoring. If there is any violation of securities rules, the BSEC would ensure punishment, said Karim, who also heads the surveillance activities of the market regulator.