Retail investor stake in 115 bankrupt companies nears Rs 1,000 cr

Retail investors hoping for a turnaround in listed companies mired in bankruptcy proceedings hold significant stake in them.

A Business Standard analysis of 115 companies undergoing proceedings under the Insolvency and Bankruptcy Code (IBC) showed that retail investors held stake in a majority of them. There were nearly 7,500  individual shareholders per company on a median basis, among those holding nominal share capital of up to Rs 1 lakh for the full sample. They held an average stake of 16.3 per cent. The analysis is based on data as of February 3. The sum of the value held by individual shareholders was Rs 886.8 crore across the sample. 

The total value of shares held rises to Rs 2,769.3 crore if one includes individual shareholders holding nominal share capital in excess of Rs. 1 lakh. This typically refers to richer investors who buy bigger stakes in the company. Their average stake was 26.9 per cent. Many of these shares have already crashed in price, suggesting that the stake may have been worth more earlier.

A total of 102 companies were worth less than Rs 100 crore in market capitalisation. Around 48 were worth less than Rs 10 crore.  

Jimeet Modi, founder and chief executive officer at Samco Securities said that retail investors should be looking to get out of companies entering bankruptcy rather than hold on because losses are more likely than not to occur for these listed firms.

“In nine out of ten cases the equity shareholders are going to get wiped out,” he said.

There have been 4,008 companies admitted under the Corporate Insolvency Resolution Process (CIRP) of the IBC since inception, shows the Reserve Bank of India’s January 2021 Financial Stability Report.  The report noted that nearly half of the closed CIRP cases resulted in liquidation orders. It said that for 73.5 per cent of cases for which data is available showed corporate debtors which were defunct or had been with the Board for Industrial and Financial Reconstruction (BIFR), an earlier body which dealt with such companies. 

“...the economic value in most cases had already eroded before they were admitted...These corporate debtors had assets, on average, valued at less than five per cent of the outstanding debt amount,” it said.

The average stake was highest in companies with under Rs 50 crore in market capitalisation (see chart).

Samco’s Jimeet Modi said that many investors get into such companies on the hope that the share price will rally. He said that many think that there is not much downside when the share price is already low, for example at Rs 10, without realising that they can still suffer a 100 per cent loss in such stocks.

Independent market analyst Ambareesh Baliga said that existing shareholders value is significantly eroded even when an acquirer comes through to turn around the company. The additional capital infused dilutes the stake of existing shareholders to a fraction of the original price. Coming back just to breakeven levels can be a tough ask.

"To get that sort of return is going to take ages," he said.

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