Stock exchanges in an effort to seek wider participation are trying to increase the number of liquid stocks. They may introduce some innovative products for this purpose. If rating agency Crisil's efforts succeed, stock exchanges may sponsor research in some of the fundamentally strong, but less liquid counters to attract investors.
While around 200 stocks are active on the Indian bourses, the number in the US could be a few thousands.
The rating agency is now promoting a new product which grades listed companies in terms of fundamentals and valuation. The product is an upgraded one from the agency's earlier product for rating initial public offerings (IPOs). The company had approached stock exchanges to sponsor bulk research on some of the illiquid stocks, said a Crisil official. The agency had introduced the product a couple of month earlier. Volumes in listed companies covered by the report have gone up substantially, said the official.
Globally, stock exchanges sponsor research and cover only liquid companies. In India, around 170 companies are covered by more than 10 analysts. But follow-up reports are not frequent. Nearly 80 per cent of listed stocks are not covered by analysts.
Several stock exchanges, including Singapore, Hong Kong, AIM (London), and Bursa Malaysia sponsor independent equity research by outside agencies to improve liquidity in illiquid companies. Investors, wealth advisors and foreign institutional investors (FIIs) have been sponsoring research of listed firms by outside agencies such as Standard & Poor's.
Some of the well-known FIIs outsource research of listed companies. Internationally, this has been happening for quite some time now. In India, this could be the trend in coming days.
"We are able to provide unique insights, as our research business covers 52 sectors in depth. If the company is covered, it increases its credibility among investors," the official said.
Crisil's IPO grading only covers the fundamentals, but listed stocks will have additional grades for valuations. A 5/5 grade suggests potential for over 25 per cent of price rise, or strong upside, while a 1/5 grade means strong downside of over 25 per cent.
Several stock exchanges including Singapore, Hong Kong, AIM (London), and Bursa Malaysia sponsor independent equity research by outside agencies to improve liquidity