After 7,700% surge in stock, Orchid Pharma to face reality check

 New owners have to divest part of their stake of about 98 percent in the firm, which re-listed in Mumbai in early November after emerging from bankruptcy

A shortage of shares has helped drive a surge of almost 7,700 percent in Orchid Pharma over the past seven months. And now it looks poised to end.

New owners have to divest part of their stake of about 98 percent in the firm, which re-listed in Mumbai in early November after emerging from bankruptcy. That’s to comply with an Indian regulation that requires the new owners — in this case, Dhanuka Laboratories — to boost the minimum public float to 10 percent over the next few months.

Orchid is among a handful of Indian companies to post meteoric gains after exiting bankruptcy proceedings. Such rallies could pose considerable risks for investors as those firms typically don’t have good fundamentals, according to some market watchers.

In a bid to limit such occurrences in the future, India’s securities regulator in December decided, among other measures, to reduce to 12 months the period such firms have to meet the minimum free-float requirement, down from 18 months earlier.

“It’s not really an investment, I call it fun and excitement,” said Ajay Srivastava, managing director of New Delhi-based consultancy Dimensions Consulting Pvt. While trading such stocks is an “adrenaline rush,” the share sale by founders will force the valuation to likely become more realistic, especially since the pandemic has brought new value to legitimate drug makers, he said.

Dhanuka won the Orchid stake after a three-year legal tussle. Creditors got 1 percent in the restructuring, with another 1 percent going to existing shareholders. Apart from working to boost the public holding, Orchid’s board is also evaluating a proposal to merge the unlisted Dhanuka Laboratories with the company, according to an earnings statement released on May 22.

With about 99 percent locked in with founders and lenders, barely about 2,000 Orchid shares have been traded on an average per day. But those precious few had, until recently, always found willing investors — with the stock rising by the daily limit about 100 times since November. As time runs out before the divestment, though, it has fallen sharply from an April peak