Should regulators intervene in the stock market?

  • Business
  • Saturday, 19 Nov 2011

AS I write this, at least a dozen Unusual Market Activity (UMA) requests have been issued to various penny stocks, the most in any given month for as long as my memory serves.

The purpose of issuing the UMA is to ask such penny-stock counters such as textile producer Maxbiz Corp, technology provider GPRO Technologies, timber company Harvest Court Industries, plastic injection mould fabricator Sanichi Technologies, oil and gas firm Hibiscus Petroleum and consumer products trader Emico Holdings, whether material reasons exist for the steep increase in their prices and sudden surge in volume.

The list goes on: other penny stocks that have also seen the stock exchange ask for an explanation for their huge volume and price increases were property developer Karambunai Corp, air and water filters maker Envair Holdings, technology company Patimas Computers and engineering and construction company Sumatec Resources.

With queries also issued to SYF Resources Bhd, DPS Resources Bhd and Flonic Hi-Tech Bhd, this month of November must have now surpassed the record 10 UMAs that Bursa Malaysia issued in October 2009.

And as has been typical in the past, each company replied in the negative, saying they could not explain the steep rise either in their price or the trading volume.

The unusual activity has prompted the Securities Commission chairman to warn investors to be cautious, since the rise of many of these stocks have come without material corporate developments.

In noting that the SC and Bursa have surveillance systems to monitor all price movements, she added that action would be taken depending on the outcome of such surveillance.

On Monday, the Bursa took action. In designating the shares of Harvest Court, investors will have to pay in cash, upfront, for stock in the company. The last was Iris in 2006.

Unsurprisingly, the stock has plunged.

Should the regulators intervene in a market?

The answer is yes.

The reason I say this is for reasons of orderly and fair market.

The stark contrast between the huge price and volume gains in these stocks when contrasted with the omission of material information and developments does not justify the sudden and extreme upsurges.

In the case of timber-related company Harvest Court, whose share price was 8 sen from the beginning of this year until Oct 14th, the price had soared some 2800% and the only material development has been its acceptance of an award to construct commercial and residential developments for Sagajuta (Sabah) Sdn Bhd, a property developer controlled by its new substantial shareholders .

We believe that circuit breakers must be put in place to institutionalise a fair and orderly market, which is accompanied first by UMAs, then warnings, and finally a designation.

To be fair, the exchange had issued two UMAs, one market alert and only then designated Harvest Court stock.

Rightly so too these actions are to be done only when absolutely necessary to maintain an orderly and fair market.

Observing good corporate governance is essential and all players must play their bit.

This would undoubtedly include major shareholders who must ensure that the company's best interest is utmost in their minds for long term sustainability of the company and the overall integrity of the stock market.

Rita Benoy Bushon is chief executive officer of Minority Shareholder Watchdog Group

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