New Sebi norms reduce listing-day volatility

Listing-day restrictions introduced recently by the Securities and Exchange Board of India (Sebi) have significantly reduced price volatility by curbing speculative trades.

According to an analysis, the average fluctuation in share prices (difference between the highest and lowest prices on the day of listing) for companies that got listed last year was a little more than 100 per cent. The new rules have significantly reduced such volatility. While NBCC and MT Educare, which got listed last week, moved within a range of just five per cent, shares of MCX, which got listed in March, moved in a band of 11 per cent on listing day.

Said Girish Nadkarni, executive director, Avendus Capital, “Since only delivery-based trades are allowed in smaller issues, volume and volatility will automatically come down as speculators won’t be able to participate.”

Added Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, “It’s not just about the rules but also the quality of the issues and the pricing. Most companies that have entered the market after this year have been good quality issues, unlike last year, when we saw a lot of dubious companies get listed.”

In January, Sebi had put in place a tight framework to curb the high volatility and price movements observed on the first day of trading.

Many small-sized companies that were listed last year had seen unprecedented price fluctuations in the first few days of trading. For instance, Indo Thai Securities, which got listed on November 2, saw its share price move between Rs 18 and Rs 99 on the first day of trading.

However, in what could be a negative for brokerages and stock exchanges, the new rules have significantly impacted first-day trading volumes. Broking houses and exchanges generate revenues from trading activity.

The two initial public offerings (IPOs) that made their stock market debut last week saw a first-day trading volume of just a fraction of the issue size. Before the new rules came into play, companies making their debut clocked an average turnover of four-five times the issue size.

According to market participants, Sebi’s move to allow only ‘delivery-based trades’ for issues of less than Rs 250 crore for the first 10 days after listing, is the main reason for the thin trading volumes.

Both NBCC and MT Educare clocked an unusually low trading turnover of Rs 21 crore each on both exchanges combined, just a fifth of their issue size. Some companies that got listed last year, including Indo Thai, Sanghvi Forging and Rushil Decor, had seen first-day volumes of more than 15 times their issue size.

Under the new norms, the regulator has extended the pre-open call auction window to IPO companies for arriving at an ‘equilibrium price’. Further, it has introduced tight circuit filters of five per cent or 20 per cent, depending on the issue size.