Got shorty! As new listings swing wildly, many lose pants

Violently volatile new listings are making nervous wrecks of short-sellers.

In many recent cases, they have been forced to buy back shares at far higher levels, which adds to the volatility in initial public offerings, experts said.

Short-selling is a process by which traders sell a stock they don’t own, hoping to profit by purchasing it at a lower price before delivering it to the buyer.

There have been six listings in October so far, and the difference between the high and low prices on opening day has been close to 100% or more in four cases.

Imagine someone shorting at the bottom price of the day. Add interest cost if any, and the trader will be in tatters before you utter Flash Gordon.

To wit, the difference between the high and low of Prakash Constrowell as a percentage of its issue price was 96.01%. It was 92.85% for RDB Rasayans and in the case of Taksheel Solutions, 97.67%.

The latest —  M & B Switchgears — which listed on Thursday, swung as much as 127.61% from its day’s low.
On average, these six issues have swung 82.63% between their highs and lows.

Those who had been active in recent smaller issues many of which have poor fundamentals, have been hit, said Arun Kejriwal, director of Kejriwal Research & Investment Services.

“Short-sellers were trapped. They have been forced to cover positions, despite the quality of issues not very high,” he said.
Listing-day volatility could have affected thousands, said S P Tulsian, independent investment advisor.

“The fallout of this volatility is borne by 3,000-5,000 traders and small investors who get lured into buying or selling the stocks on listing day and get caught on the wrong foot. Prices go up further as many of them would not have covered the shorts,” he said.

While credit raters, which provide an independent opinion of the fundamentals of the company, have given a rating of 3, indicating average fundamentals to one stock, they have given 2 or lower for five of these issues, which indicate below-average or poor fundamentals.

The swing in these stocks could also be because of the small size of the issues, said Prithvi Haldea, chairman and managing director, Prime Database.

“The fact that these are low free-float stocks, the prices can move quite violently if there is sudden change in demand supply scenario. However, these recent small issues have not seen much genuine retail participation and the issues are getting subscribed through placement of shares by the issuers,” he said.
The six stocks had an average issue size of `60 crore.
The IPO index, a measure of how newly listed companies have done, has also underperformed the broader market represented by the Sensex. It fell 5.01% over the last one month compared with a 1% fall in the Sensex.

Over the last one year, it fell 28% compared with 14.8% in the Sensex.