The Financial Supervisory Commission last week announced that it would implement new listing requirements for so-called “penny stocks” next quarter to improve the quality of local equities.
The commission has accepted the Taiwan Stock Exchange’s suggestion to drop shares with a net value of less than NT$3 to facilitate managing the nation’s publicly listed companies. The new rules would also apply to companies that certified public accountants doubt can continue to operate soundly, the commission said.
Penny stocks — also called “egg-and-dumpling shares” because of a share price of NT$5 or less — are not uncommon around the world. They are attractive to some investors because they are more affordable than mid or large-cap stocks.
The allure of penny stocks — as seen by the number of advertisements for them or by how often stock market shows on local TV channels discuss them — is that people hope to win big with little expense, despite the generally higher risks and significant losses.
Investors can be interested in penny stock companies for other reasons. Employees could become their own boss by holding a majority of their company’s shares; some investors help turn around a money-losing business venture so that they can reap the profits; and other investors view the companies as assets that can be repackaged and resold at a profit.
Regardless, companies with penny stocks are suspected of inadequate and less-than-transparent financial reporting.
Certain events might warrant buying penny stocks. For instance, a company is to be launched or a new patent is being granted, making the stocks seem like good investments for investors with plenty of experience and an appetite for high-risk stocks.
How a publicly traded stock becomes a penny share has a lot to do with a company’s performance and the underlying fundamentals of the industry that the company is in. As such, it should surprise no one if the company is one day delisted from the local bourse.
Companies are usually delisted in Taiwan after financial statements are not submitted to the stock exchange, their net value per share drops below zero and fails to recover within a specified period, or they undergo corporate restructuring due to financial difficulty.
No exit mechanism is mandated for penny shares, so the commission’s new requirements would give the companies a grace period of three years in which to make improvements — such as pushing for recapitalization or other reforms to improve their profitability — before seeing their shares delisted.
As the commission is not targeting shares with low transaction volumes or those consistently priced below a par value of NT$10, but rather shares in companies whose owners or major shareholders have shown no interest in running their core business, have ignored their shareholders and appear to be just hanging on until good offerings come along, the planned delisting mechanism is not expected to put much pressure on small-cap stocks.
The new requirements are well-intentioned and fitting. Their implementation would allow investors to re-examine their investment portfolio and distinguish between valuable small-cap stocks and penny stocks that have all too often proved ripe for manipulation and prone to fraud.
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