Friday, 23 May 2008

The KGN Story

Imagine a stock moving up by 117115% in a single day of trade.

"KGN"(Khwaja Garib Nawaz) Industries opened at INR 100, moved to an intraday low of INR 72, and then shoots up to intraday high of INR 55,000 and then closed at INR 21,000. Dreamy affair. But, is this normal? What would have happened? Is it a flaw in the rulebooks of the regulatory authority, that allowed this to happen? Or is this just fine?

I was shocked, amazed, puzzled, and scared to see this all at the same time. They say that the promoter has already accumulated a wealth worth 5.5 K Crores. Can anybody else repeat this? If yes, then how? They say that the price is high because the volume is low. Only 847 shares are in circulation, on that day(May 21, 2008) there were only 819.

I am no expert in economics, but as a layman I can understand that the worth of an article is as much an investor or buyer is keen to pay. There is a "Fair Price" to every article. In a free market, or where there is ample competition, the bid/offer price(s) always converge(s) towards the Fair Price. (Just to clarify: Bid is the amount one is ready to pay to buy an article, and Offer is the amount at which the seller is selling. Yes, you can have 2 prices to an article. See you soon on this.) For a small company with a turnover of about 186 Crores in March 2007 and an employee strength of 20, is this a fair price? Certainly not - I am not an expert, but I am sure you will agree. That makes its price to earnings ratio, which measures how expensive a stock is, look ridiculously exorbitant: Rs 22,060.

Lets try to investigate what would have happened. This stock was re-listed on BSE(Bombay Stock Exchange) after 7 years, and after this astronomical shootout, the trading on this stock had to be suspended. BSE confirmed that there is no price band on scrips on the opening day of trading in order to allow price discovery. KGN used it to its benefit to the fullest extent possible.

BSE had to intervene when they saw that order were placed at "unrealistic prices". So somebody was offering a Lamborghini price for a Nano!!!

This has happened quite a few times before. Once with a company called "Ahluwalia Contracts" that started off at 101 shoots to 611 and closed at 577 - not substantial but its still more than 500%. The other one was MMTC, and it touched 56,931 on November 12!!!

BSE had a couple of recommendations on these lines that are yet to be implemented. SEBI(Securities and Exchange Board of India - The primary governing authority in India) has proposed to impose a 20 per cent circuit filter on the first day of re-commencement of trading in stocks in all cases of revocation of suspension, de-merger, amalgamation, capital reduction and scheme of arrangements as decided by stock exchanges through a concept paper brought out last year in April.

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