Sebi whip on 331 shell firms clouds market, infra and realty worst hit

The Indian markets on Tuesday posted their biggest single-day fall in three weeks after the Securities and Exchange Board of India’s (Sebi’s) clampdown on 331 suspected shell companies weighed on investor sentiment and sparked fears of further action.

Real estate and infrastructure shares were the worst hit among the pack. Investors dumped the shares of companies in these sectors, fearing they could face regulatory wrath because of potential links to shell or dubious entities. 

Investor wealth plunged Rs 1.43 lakh crore on Tuesday amid sell-off in the stock market where the BSE benchmark index slumped nearly 260 points.

While the order identifies 331 companies as “suspected shell firms”, market experts say the regulatory authorities have gone after even well-functioning companies with potential doubtful links. The benchmark BSE Sensex lost 0.8 per cent to close at 32,014, while the Nifty ended at 9,978, down 78.8 points, or 0.8 per cent. Even the broader markets followed the trend as the BSE mid- and small-cap indices lost 1.2 per cent each. The BSE sectoral index for realty stocks slumped 4.5 per cent. HDIL’s shares dived 18.7 per cent, while Unitech and DLF fell nine per cent and 6.7 per cent, respectively.

“The immediate suspension order is harsh. The government has cracked down against decent-sized companies which may have suspicious links. If the government continues with this approach, there could be more companies that might face action,” a broker said. 

Market players said the fall in the benchmark indices was more on account of profit-taking following this year’s spectacular rally. “The idea behind Sebi’s move is to curb malpractices. While it had some impact on the smaller companies, the overall fall in the markets on Tuesday was more on account of profit-booking, especially in the banking shares,” said Deven Choksey, managing director at KR Choksey Securities.

The fall in the benchmark indices was mainly led by the banking stocks. The BSE Bankex — a gauge for bank shares — lost 1.3 per cent. The shares of State Bank of India fell 2.3 per cent, while ICICI Bank and Axis Bank lost 1.7 per cent and 1.3 per cent, respectively. Poor earnings and plaguing US FDA approvals continued to weigh on Dr Reddy’s Laboratories’ shares as they fell five per cent on Tuesday, the highest by any Sensex constituent. In the past five sessions, the drug major has lost more than 13 per cent.

Market players said the markets could continue to remain soft but rule out a sharp correction in large-cap names. Indian equities would be supported by strong portfolio flows from institutional investors, they said. Although concerns over the impact of the goods and services tax (GST) and earnings recovery could pose short-term headwinds, the long-term picture looks positive, analysts said.

“These are not permanent structural bottlenecks for growth, but it would be premature to undermine them in the near term. We expect the Nifty50 index to consolidate in the base case around our target value of 10,000, but do not rule out overshooting due to bouts of optimism and flows. Further, our Nifty50 target could see incremental upsides once we incorporate FY20 earnings estimates after the conclusion of first quarter results of FY18,” said Vinod Karki, vice-president (strategy) of ICICI Securities.

Foreign portfolio investors have bought shares worth Rs 1,539 crore ($244 million) in Indian equities, while domestic institutions net purchased Rs 798 crore worth of shares, data from the bourses showed on Tuesday. Market players said the high institutional buying figure was due to share sale in Bharti Infratel by parent Bharti Airtel. 

From a medium-term perspective, valuations continue to be a concern for the market participants. While the broader markets are already trading at their peak valuations, even the large-caps are heading towards their lifetime-high valuations. The BSE Sensex is currently trading 24 times its trailing 12-month price to earnings (P/E); the mid-cap index is trading 34 times its P/E, data showed. If these valuations are not justified by a recovery in earnings, experts say, the markets can witness a major correction.