BSE to review 'A' group reshuffle - Views on News from Equitymaster

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BSE to review 'A' group reshuffle

Aug 21, 1999

According to newspaper reports, the Bombay Stock Exchange (BSE) has decided to review its decision to reshuffle the 'A' group by adding 27 new stocks and removing 26 existing stocks. The decision had stimulated market interest in a number of new 'A' group stocks, some of which have registered sharp gains since then. The review has been prompted after an informal discussion with the Securities and Exchange Board of India (Sebi).The regulator is concerned regarding the promotion of some stocks, which are prone to stock price manipulation. Another concern pertains to the illiquidity in some of stocks, as this could create a payment crisis.

The euphoria surrounding the promotion of stocks arises from the fact that the BSE permits forward trading only in 'A' group stocks. Forward trading permits buyers and sellers of 'A' group to carry forward their long and short positions. The attraction for 'A' group stocks is enhanced by a system of trade financing, which stimulates traders to go long or short in these stocks. This, in a way, is a legitimate way of speculating in the markets and creates liquidity in these stocks. Generally, 'A' group stocks are likely to trade at a premium to their B group counterparts because of these factors.

From the table below it can be concluded that most, 24 of the 27 stocks to be exact, of the stocks that were upgraded to the 'A' group beat the Sensex, which rose by 3.5% during the week. On the other hand, the stocks that were removed from the list registered a listless performance, with some even registering large losses - 15 of these stocks underperformed the BSE Sensex, while 9 of them posted negative returns during the week.

New entrants in the 'A' groupEx 'A' group list

The decision to review the reshuffle could trigger off a selling spree in some of the newly promoted stocks, as momentum investors have built long positions in most of these stocks throughout the week. This move could further dampen the market sentiment, which has been reeling under the pressure of FII sales over the past fortnight.

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