SEBI has announced new norms for listing day for IPO’s. These norms would certainly hit the manipulation and first day disaster in IPO’s which had become a norm these days. Very clearly post the order on seven companies in December 2011, which had tapped the capital markets these guidelines were keenly awaited.
The broad guidelines divide the companies into two categories with the cut-off point being the size of issue at Rs 250 crs. All companies would on listing day have a call auction which is similar to what happens these days between 9 am and 9.15 am for the companies which are part of the SENSEX and NIFTY. This call auction or price discovery would happen for 1 hour from 9 am to 10 am and then trading would begin as normal with the discovered price or the equilibrium price being the base for the day. First day circuit filters would be 5% for issues below Rs 250 crs and 20% for issues above Rs 250 crs. In case no equilibrium price is discovered than the IPO price would be the base. From day two the normal circuit filters would apply. In addition the really important condition that has been introduced for issues below Rs 250 crs is the fact that such issues would trade on “Trade for Trade” basis which means that every transaction would result in delivery. This would reduce the volume considerably. Readers would recall that the norm for first day trading volume would be anything between 10-20 times the IPO size on day one.
The above norms would also apply for issues which are re-listed.
The above is a brilliant step taken by SEBI and they need to be complemented for the same. The present modus operandi of people behind issues was only possible because lack of circuit filters on day one gave a free hand to people behind the price manipulation to trap investors and exit on day one. Either of two things happened on day one of listing of an IPO where either the share price rose 60-70% 0r even beyond 100% on day one or prices crashed a minimum of 65%. This has happened consistently and in either case the person/entity behind the stock was able to exit. With a price band of 5% in sub 250 crs and a trade for trade restriction for the first ten trading days this is completely blocked. Gone are the days when non-descript companies would record turnovers of multiple times Reliance turnover on day one.
I believe these steps will ensure the revival of the primary market and I would urge merchant bankers and promoters of companies to bring issues which are fairly priced and offer appreciation opportunities to risk takers. I primary issues are brought with this objective, the market would certainly see a revival and improvement in the quality of issues.
