Understanding the Stock Trading Suspension

You may have bought a stock, and then when you are about to sell it, you can’t. After you check it, it turns out that the stock you bought exposed to suspension aka cannot be traded in certain period, so that automatically, you cannot sell it because the stock exchange authority (the IDX) doesn’t allow any transaction relating to the sale and purchase of shares that you hold. Then, it’s reasonable if you panic in such situation, because your money status that is stuck in the stock becomes unclear (if you only experience loss, it is still tolerable). But is thus your funds really disappear just like that? Here’s the explanation.

Temporary suspension or termination of trading stock activity (usually called as trading halt in the foreign country), is one of the sanction forms from IDX to certain company that has done particular violation. Based on the IDX regulation, suspension is the fourth level of the sanctions, or one level below the toughest sanction, where the company got kicked out of the stock exchange (delisting). The following is the sequence of those sanctions, from the mildest until the most severe:

1. Maximum fine of Rp500 million (about US$50 grand)
2. Written warning
3. Another written warning
4. Temporary suspension to do trading activity in the stock exchange.
5. Revocation of membership in the stock exchange (delisting).

Stock suspension can also be done if the company in question ask for it, or due to certain policy from the IDX (so it’s not necessarily because of the violation). For example is to stop the further decrease in the stock price, as happened on last 2008’s crash.

Back to the regulation matter. The IDX’s regulations do not specify about the kind of violation that can causes certain company to be exposed by one of the five sanctions above. Probably that’s because there are so many forms and types of violation that can be done by the company and can evolve in the future. For example; because now the investors are used to use internet for trading, maybe later there will be a violation related to the online trading. But if we carefully research, here are some of the common violation done by the companies, so the company in question can be fined or removed from the stock exchange.

1. Unusual Market Activity (UMA), aka trading activity that out of the ordinary, e.g, if certain stock rises or falls overly great. It is the most common one, although cannot actually be called as violation as well.
2. Errors in recording the financial statements, or the financial statements did not obtain comments from the auditors, aka disclaimer.
3. There are differences between the announcement of corporate action with the actual events.
4. Fail to pay debts or bonds.
5. Insider trading
6. The misuse of funds from IPO or right issue, etc.

When IDX asses that a company commit a violation, then the sanction is not directly imposed. IDX will give the chance first for the company to defend or clarifying. Once obtained an agreement, then the sanction will be imposed. If the sanction  is in form of suspension, then the length of time becomes full authority of IDX, though usually the company is also allowed to file an objection if the suspension time is too long.

It’s just that, the investors are often not given any official announcement regarding how long a stock will be suspended, except through the media. But perhaps IDX also has its own policy on the matter.

But the point is, when the stock you held is being suspended, then your funds won’t go anywhere, because the suspension is only temporary. You will be able to withdraw them, as soon as the suspension is revoked. But problem is, we never know when the suspension will be revoked. If the infraction is severe, then the suspension can be quite long.

In determining whether a stock will be the subject to sanctions of suspension or not, then in addition to listening to the explanation of the company, IDX also has its own discretion. For example, when there was the case of Bank Capital that involved stock of members of the Bakrie Seven Brothers (B7) and Benakat Petroleum (BIPI). The violations they had committed actually cannot be said as mild, because they obviously have made a mistake in its financial statement document, whether intentional or not. But in the end, those companies were sentenced with the lightest sanction, namely a fine of Rp500 million.

Why the stocks of B7 and BIPI wasn’t exposed to suspension? Because their stocks are very liquid, and the trading activity itself is relatively reasonable, and had never experienced UMA. So if they were being suspended, then the securities would make a fuss, because they would lost certain percentage of their revenue, which was derived from the sale and purchase transaction fee of B7 and BIPI’s stock.

Here are some characteristics of stocks with relatively high risks of being suspended:

1. The price is low, below Rp1,000 per share
2. The trading volume is not liquid, or never been traded at all.
3. The company’s performance is poor, or has lots of debts.
4. The company’s asset and the market cap is small, so the stock is easily manipulated and UMA easily occurs.

The stocks of bluchips or LQ45 usually have good liquidity, and the size is big, so they rarely exposed to suspension, although sometimes their performance is poor, or the stock price is below Rp1,000  per piece (for example is B7).

Then, whether there ever a company that receive the toughest sanction, which is excluded from the exchange? In the past, IDX probably ever did so, but lately it never seems to. BEI would think a dozen times before deciding to remove a member, because it means less revenue for the exchange itself. No matter how severe a violation committed by the company, usually the toughest sanctions is only suspension, where the of suspension may be imposed only for a week, or months. BEI will delisted a company if the company itself asks for it. Recent example is Aqua Golden Mississippi (AQUA).

And if a company is really removed from the exchange, then there will be a mechanism where the public investors’ funds can be liquidated before. Usually, the company will be asked to buy back the stocks that held by the public investors. It was also the same with AQUA.

In the end, if you don’t want your stock to be suspended so you cannot sell it back, then buy the stock that has good performance and good stock movement. If you want to trade, limit your trading on the liquid stocks only.

Original article was written on September 1^st, 2010.