65,000% in a year! How long before the penny stock bubble bursts?

Mumbai: Ahmedabad-based Bharat Global Developers isn’t the only company that has had its shares shooting up to dizzying levels. The world of little-known penny and micro-cap stocks has been abuzz with activity with shares of at least 200 companies skyrocketing between 300% and an astonishing 65,000% in the past year. The action underscores the heightened appetite among investors for red-hot stocks of companies with limited earnings amid the recent stock market frenzy.

It’s not uncommon for stocks to generate exceptional returns in a bull market, like the one in the past four years, but what’s unusual is that 99 companies posted net sales of less than Rs10 crore in FY24, a fraction of their total market value.

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The top performer in this list is Sri Adhikari Brothers Television, shares of which surged from Rs 3 in December last year to Rs 2,198 on December 10. The market capitalisation of the company, which posted Rs 3 crore turnover and Rs 21 crore loss in FY24, stood at Rs 4,600 crore. After a share capital reduction, the stock was relisted on April 2, 2024, at Rs 41 per share.

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Similarly, Marsons, a power transformer maker with Rs 6.43 crore turnover and Rs 63 lakh profit, rallied 4,478% and now has a market capitalisation of Rs 3,765 crore. Aayush Food & Herbs, with a turnover of Rs 60 lakh, surged 4,155% in the past year, pushing its market cap to Rs 671 crore.

These are among the shares of 36 companies with net sales of less than Rs10 crore that have shot up more than 1,000% in the past year.

“The frenzy around obscure small-cap stocks mirrors the 2007 retail excitement before the global financial crisis,” said Dhiraj Relli, MD and CEO, HDFC Securities. “Many SMEs and small caps have seen their valuations skyrocket despite no meaningful improvement in business fundamentals.”Shares of Hindustan Appliances, Vantage Knowledge Academy, BITS, Ace Engitech, Oswal Yarns, EPIC Energy, IMEC Services, Ceenik Exports (India), Ahmedabad Steelcraft and Tahmar Enterprises too rallied as much as 1,000% in one year. All these companies had a revenue of less than Rs 10 crore in FY24.On Monday, the Securities and Exchange Board of India suspended trading in Bharat Global Developers, the shares of which have risen over 10,000% in one year. Sebi’s investigation found that the company’s financial statements appeared to misrepresent the actual status.

“Many penny stocks have seen unwarranted activity for months, with inexperienced retail investors flocking to speculative trading,” said Ravi Sardana, an investment banker. “A large number of these new investors, with little market knowledge, are being exploited by unscrupulous operators.”

In August, Sebi cautioned investors against investing in the shares of unknown companies, highlighting instances where certain small and medium enterprises (SMEs) engaged in price manipulation by creating an unrealistic picture of their operations. Sebi noted that, after listing, some SMEs or their promoters made public announcements to project a positive image of their businesses, often followed by corporate actions such as bonus issues, stock splits and preferential allotments.

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In October, Sebi took action against Trafiksol ITS Technologies, cancelling its SME IPO and directing the company to refund investors’ money after uncovering irregularities.

“Retail investors, driven by FOMO (fear of missing out) and unverified social media tips, are blindly funneling money into these stocks without proper due diligence,” said Relli of HDFC Securities.

Last year, Sebi barred 55 entities from the securities market for alleged price manipulation through YouTube and subsequently offloading the inflated shares of Sadhna Broadcast and Sharpline Broadcast.