CAM Process - Effect on Secondary Markets & Benefits to Investors

CAM process if carefully implemented will add large number of small/medium investors to the stock market looking for investment in less volatile securities. If successfully carried out over a year or two this will also add good strength to IPO of comparatively smaller issues of public companies by stimulating investor confidence in such stocks. Thus both primary and secondary markets which are presently organized lop-sided can turn comprehensively representing both large number of retail players in addition high net worth institutions.

It will broaden securities market and bring more scrips to be offered to the personal/institutional investors. Presently there is a cap on the investment in illiquid shares by MFs. While this need not be lifted, this can be progressively increased to bring professional investors interested to this market. The scheme would upgrade more and more of illiquid stocks to the better categories of less-liquid and finally totally liquid.

Other benefits are listed below.

1. CAM provides a market-trading environment, which introduces concentrated visibility and attention on illiquid stocks that would be exclusively traded. Batching orders for simultaneous execution at a single moment at a single price is the essence of call auction trading. Investors would be more comfortable to trade having the information on demand and supply in specific scrip.

2. Consequently the regular stock exchanges, brokers, depository participants, depositories, custodians and the regulator are freed of this strain and attend to the normal functions

3. This is possible due to segmentation of the large number of stocks that was illiquid and eligible to be converted into separate category for CAM.

4. As a result, in the continuation market, one has to monitor only a limited number of stocks, which is highly priced with large volumes.

5. According to the BSE management, the proposed single order book under `S' group trading platform would offer to the investors a greater facility of investing or exiting in these scrips in view of increased liquidity. This would also help companies in raising fresh resources from the capital market, based on their performance on the stock exchanges.

6. This may also eventually help to revive and give more business turnover to BSE and RSEs.

In many cases stocks become illiquid in a large continuous market more on account of its structural complexities than due to marked deficiencies in the stocks as an investment option. In making an investment the three considerations are 'Return', 'Risk' and 'Liquidity'. If the investor is satisfied with risk and return adequately, he may opt to accept less of liquidity. In fact all his investments are not liquid. For example investment in real estate can never be deemed as liquid. Still real estate investments are not categorised as bad. Another example is investment in Public Provident Fund. This investment also cannot be considered liquid, though PPF happens to be a choice preference to many investors. Lack of liquidity can be compensated for alternate options of better security (low-risk sensitivity) and profitability. Investors would not have been attracted to illiquid stocks a few years earlier, as the interest rate on bank deposits were ruling at 10% and above. But when bank interests are being quoted below 6% now, this must be a welcome opportunity, if investors are properly educated.

Call market auctions open the Investors to newer opportunities/options for taking informed decision. Premium stocks in the continuous market are costly and subject to higher degree of volatility. The investor may either reap a fortune or lose heavily leading to his total bankruptcy. To quote a concrete example the premium equity stock of Infosys Ltd. (Face value Rs.5/-) was quoted at prices ranging from Rs.6100/- to Rs.2571/- during the last one year. This market is specifically suited to the high net worth individual and large institutions. To take advantage of the short-term volatility of the stocks in the market, speculators rush in large numbers and bulk of turnover by them are in fewer number of selected scrips (numbering about 100 out of 7000)

This market (countrywide screen trading by NSE/BSE) is not ideally suited to the mid-cap and smaller investors. Small investors may park between Rs.50,000 to Rs.2 Lacs, while mid-size investors may go further between Rs.2 Lacs to Rs.10 Lacs. They are more interested in securing a steady and assured stream of returns over a period and do not look to quick windfall gain coupled with the inherent risk.

As the list of illiquid shares to be traded would be selected carefully with reasonable consideration given for concepts like "earnings per share" (EPS) and P/E ratio, these cannot be rated as poor investment options. The investor may further be able to get a more competitive price as a further benefit at the Call Auction market to compensate for him for investing in the illiquid stocks.