The Scheme of Call Auction Market for Illiquid Stocks - An Assessment
Will the call auction market be successful in bringing liquidity into moribund stocks or will it be
just an exit route for the existing investors of these stocks?

Primarily it should be the responsibility of the Corporate (issuer of the stock) to foster liquidity and stable market value to the stocks of his concern. The role of SEBI/Stock exchange should be that of a facilitators. It should be the objective of the corporate organization to accept "wealth maximisation" of the business enterprise as the goal of financial management, which is reflected in the earnings per share of the firm and the market price of its shares. As the shares of the firm are traded in stock exchange, a good performance of the firm results in the price at which the shares are traded. When the firms shares attracts a good price, the owners or shareholders are better of, because the market value of their investment appreciates. According to Van Horne "Value of a firm is represented by the market price of the company's stock...The market price of a stock represents the focal judgement of all market participants, as to what the value of the particular firm is. It takes into account the present and prospective future earnings per share, the timing and risk of these earnings, the dividend policy of the firm and many other factors that bear on the market price of the stock. The market price serves as a performance index or report card of the firm's progress. It indicates how well management is doing on behalf of the stakeholders. The responsibility should attach to the one who reaps the benefit.

It is the responsibility of the firm to make bonafide disclosure of all relevant information to enable the investor to make an informed decision that the equity offered is a remunerative investment. If the face value of its socks is high-priced, say Rs.100/-, the firm can split the stocks to smaller denomination say Rs.10/ or Rs.5/- to expand its base of shareholders, and thus widen market for the shares.

The firm finally has to find ways to secure better business growth in addition to profitability to bring higher market demand and value to its shares.

Viewed in thisperspective, dealing with illiquid stocks and bringing them back to life is tackling the problem at the terminal point. As one batch of illiquid stocks are brought into traded stocks, there is no certainty that fresh accruals to the category will not take place. If perceived more rationally the problem is much more widespread than mere illquidity of stocks. If there are 4000 illiquid stocks, does it not convey that all is not well with 4000 of our listed corporate entities forming 50% of the total listed companies?

In this competitive environment a business organization can survive only if it not merely generates profits but also registers a regular and sustaining growth. The company is to declare dividends regularly, but more than its equity should be regularly improving in terms of its market value. Does it not mean that we have 4000 dormant corporates struggling to survive? On the hand we also have BSE declining in its business volume and the original status it enjoyed and on the other 20 RSEs at almost in a state of extinction. All these stock exchanges are waiting to be corporatised and demutalised.

What is the impact of these dormant business entities where sizeable scare capital has been invested? How to revitalize decaying corporate entities? The answer is mergers & acquisitions, which is now accepted the world over as the best road map for accelerated growth of a business enterprise. In this context it is worth quoting from the article “Five Business Trends Every Human Service Organization Should Understand - A Primer for Survival and Leadership” from the Website of Social Entrepreneurs Inc. Of particular relevance to our context is the fifth trend titled “Collaborate, consolidate or die. To quote an extract therefrom-

“It has been almost impossible to read the business pages in recent years without seeing more evidence of this last trend (“Collaborate, consolidate or die”). The writing has been clearly placed on the wall: the days of the totally independent company, building through internal growth and without reliance on other companies, are largely over.

“The initial driving force has come from rapid consolidation within many industries. By 1995, the number of mergers per year was over double the rate in 1985. During this time period, few industries have been shielded from "merger mania." Retailers, restaurants, hotels, airlines, hospitals, software companies, and even accounting firms, to name just a few, have experienced major consolidation. As previously noted, health care has gone through some of the most dramatic consolidation of any industry. In 1992, fewer than 3% of physician group practices were part of publicly-traded physician management companies. By the year 2000, it is projected that 29% of physician group practices will have been merged into these larger physician management companies.

“For those companies that were not included in mergers, their survival depended on responding in a way that allowed them to compete effectively against the huge, well-financed organizations that resulted from mergers. The answer was tight collaboration between capabilities-driven organizations. An example that was inconceivable only a few years ago was the recently announced partnership between Apple and Microsoft. Once bitter rivals, these companies have joined forces to take on a common enemy, IBM. For Apple, the partnership may be its last and best chance to regain a degree of prominence in the computer industry it once ruled.”

In India we have to promote mergers, collaborations and consolidations in large-scale amongst the mid-segments of our corporates. Bigger units are able to hire better skilled professional manpower and could register better performance in a highly competitive environment. These ailing companies suffer due to lack management skills and inspiring implementation of norms of corporate governance.

Another mismatch in our economy is that despite the household sector being the bulk savers in our country, this segment of savers feels shy of investing in the stock market. Only 2% of the retail investors in India enter the primary market as against 51% in other European countries and US. As per findings of SEBI the household segment had saved capital to the extent of Rs.2,65,000 Crore in the year 2000-01. Of this a paltry amount of Rs.8600 Crore alone was invested in the stock market. When this segment actively participates in the stock market, there will be increasing demand for mid-cap securities and no equity unless there are justifying reasons, will remain illiquid.