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Market regulator, Securities and Exchange Board of India (SEBI), has imposed certain additional measures along with enhanced monitoring due to concerns over listing price rises after IPOs.
So that such irregularities can be stopped. These rules will be implemented within three months
When any stock is listed, a one-hour session is held in the stock market on that day. This session is called the pre-open call auction session. During this session, market players place bids for trades at specific prices. The opening price is decided by the stock exchange on the basis of the bids thus placed, taking into account all the bids. In some cases of IPOs and re-listed shares, it came to the notice of the market regulator that orders were being placed for a large number of shares at higher prices in the call auction session and these orders were being cancelled within a few minutes of the end of the session. Such activity was suspicious and SEBI suspected that such an attempt was made to create a false supply and demand equation in an attempt to induce fraudulent listings at higher prices.
To prevent such anomalies, SEBI has proposed to close the session randomly during the order entry period in the pre-open call auction session. According to this proposal, the session will be closed anytime during the last ten minutes of order entry i.e. between 35th to 45th minute of the order entry window. Such random closure will be managed by the system itself. Thus, if this window is closed at any time, then the elements who want to get a higher listing price, if they have placed a large number of bids at a higher price, will not have time to cancel this order. Stock exchanges have also been directed to send an immediate alert if the cancelled sell trades by a player exceed five percent of the total cancellations in the respective session or more than 50 percent of the orders of a single client are cancelled. The stock exchange may also seek clarifications for such cancellations or revisions in prices. Real-time data for bids will also be made available on the website. These new rules will come into effect after three months.
How is the listing price of a share determined after an IPO?
Before the normal trading begins, a special one-hour session is held from 2 pm to 10 pm to list the shares, called the pre-open call auction session. During the first 45 minutes of the session, any player places his bid to buy or sell the respective shares. This bid contains details of how many shares one wishes to sell or buy at what price. Such orders can be placed in the first 45 minutes of the session and orders placed can be modified or cancelled. In the next ten minutes the stock exchange determines the opening price of the respective share based on the number and price of bids for sale and purchase. The last five minutes are reserved for the transition from the pre-open session to normal trading.
How will speculators perform on the IPO listing day?
In a one-hour pre-open call auction session held on the day of listing, large deals are bid at higher prices to establish that the respective shares are in high demand, and such orders are cancelled a few minutes before the 45-minute order window ends. As a result, it is possible that the share price is high at the time of listing, but then the price may drop drastically. If this happens, it will be the turn of ordinary investors to cry foul.