The market regulator on Friday announced additional controls for initial public offers (IPOs) and relisted scrips to curb excessive volatility on the listing day.
“In light of high volatility and price movement observed on first day of trading, it has been decided to put in place a framework of trade controls for IPO and re-listed scrips applicable to the normal trading session,” read a circular from the Securities and Exchange Board of India (Sebi).
The market regulator extended the call auction mechanism for price discovery to IPOs and relisted scrips, apart from placing price bands during the normal trading session on the first day of trading.
Currently, the call auction mechanism is applicable only to Sensex and Nifty stocks.
Experts believe the move was long awaited and would be quite positive in terms of reducing price manipulation and volatility.
“The move is quite a good one and would plug the loopholes in the IPO process. This seems to be arising from recent past experiences and discomfort Sebi has had with some of the smaller IPOs,” said Tapasije Mishra, managing director & group CEO, IDFC SSKI Investment Banking.
Going by the data of listings in calendar 2011, there has been average price volatility of close to 65% in 38 IPOs.
Indeed, IPOs which saw the maximum volatility were all small ones, including Birla Pacific Medspa (a `65 crore issue that saw 206% movement over the issue price), PG Electroplast (150%), Shekhawati Poly-Yarn (128%) and M&B Switchgears (128%).
The normal trading session on the listing day would take place subsequent to conclusion of the one-hour ‘call auction’ session for such scrips on the BSE and the NSE.
During the call auction, which would take place from 9 am to 10 am, the first 45 minutes shall be allowed for order entry, order modification and order cancellation. Subsequent 10 minutes would be for order matching and trade confirmation and the remaining five minutes shall be the buffer period.
The regulator has also put in place a price band of 5% (of equilibrium ‘discovered’ price or issue price if price discovery has not happened) for all scrips where issue size is less than `250 crore and those which have got relisted. Additionally, these scrips would be placed in the trade for trade (TFT) segment, where one must pay immediately to take delivery, for the first 10 days.
For new listings with an issue size of more than `250 crore, the price band applicable would be 20%.
The market regulator has instructed that these provisions be implemented in the next four weeks.
Experts believe that the introduction of TFT and mandating 100% margins for smaller IPOs is a master move, though there is still a possible loophole left.
“The call auction would help to discover honest price, while the concept of TFT would prevent manipulators to influence the price as they would have to compulsorily take deliveries. Earlier, there have been instances where one could just place sell order for a huge quantity without actually owning the stock, making the investors jittery and bringing the prices down. However, Sebi could have extended the concept of TFT to all issues as one can still come out with `251 crore IPO and escape the 5% price band. Nevertheless, it’s a good starting point,” said Dara Kalyaniwala, vice-president - investment banking, Prabhudas Lilladher.
The market regulator had cracked down on seven recently listed small companies last month for price manipulation and concealing material facts. The regulator has in fact indicated that it is looking to reform the whole IPO process so as to ensure minimum price volatility on the listing day.
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