Penny stock boom at risk as India bourse curbs price volatility

Bloomberg

New measures proposed by Asia’s oldest bourse to curb “excessive price movements” in so-called penny stocks pose hurdles for the millions of newbie traders who have thronged to that segment of India’s $3.1 trillion equity market.
BSE Ltd will introduce price bands on the movement of certain stocks based on their performance over a period of six months, one year, two years and three years, the exchange said on Wednesday. That’s in addition to standard daily limits.
The changes come as small-and mid-cap shares have been at the forefront of the relentless surge in Indian equities since the March 2020 pandemic lows, with gains driven by ample liquidity and first-time investors chasing high returns.
The measures effective from August 23 have already prompted a swift shift, with the S&P BSE Small Cap Index of 688 stocks falling for a third straight session on Wednesday to head for its lowest close in over a month. Still, the gauge is up more than 80% over 12 months, about double the gains of the S&P BSE Sensex — the benchmark for blue-chips.
“Given the sharp upsurge in mid, small caps, notably retail-led penny stocks, BSE’s add-on price bands could be a welcome step to curb speculative excesses,” said Nitin Chanduka, a strategist with Bloomberg Intelligence. “However, exchanges need to be cognizant of maintaining a balance between price discovery and implementing safeguard measures as many times such steps accentuate downside, providing no exit for investors.”
Retail investors now hold almost 70% of the free float of penny stocks, compared to 2% holdings of local mutual funds, according to Bloomberg Intelligence.
Historically, a jump in penny stocks has been a
signal to show caution, as these usually have sketchier fundamentals and are
typical momentum plays, Gaurav Patankar, head
of emerging-market equity strategy at Bloomberg Intelligence, wrote in a note.