Sebi's IPO moves to face the MCX test

Several recent initiatives by the capital market regulator will be tested for the first time in the MCX public offer

The initial public offering (IPO) of the Multi Commodity Exchange of India Ltd (MCX), which opens for subscription on Wednesday, will not only test the primary market, but also a slew of initiatives launched by the Securities and Exchange Board of India (Sebi) in recent months.

MCX is the first Rs 500-crore-plus offering to enter the market after L&T Finance Holdings’ Rs 1,245-crore offering in July. During this period, the rules of the game have seen some major regulatory changes, including introduction of circuit filters, pre-open call auction for IPO stocks, mandatory disclosure of track record by merchant bankers and simplification of IPO forms. The commodity bourse’s initial share sale will be the first to test these Sebi initiatives.

“In a way, it’s good these new initiatives will get tested with a fairly large-sized and credible offering like MCX, instead of some tiny offering,” said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.
 

NEW RULES OF THE GAME

• Simpler IPO forms
• Disclosure of investment bankers’ past performance
• One hour ‘pre-open call auction window’ for IPO stocks on listing day 
• Circuit filters on listing day

“The offering will be a pilot experiment. It’ll give investors a fair understanding on how some of these new measures, especially the listing day trading controls, work,” said a banker with a domestic investment bank, who didn’t wish to be named. “It’ll be interesting to see how it impacts the first day trading volume.”

Last month, Sebi put in place a framework to bring down high volatility and price movements observed on the first day of trading. It extended the pre-open call auction window, currently used for Nifty and Sensex stocks, to IPO companies for arriving at an ‘equilibrium price’. Further, IPOs with size of more than Rs 250 crore will only be allowed to trade in a 20-per cent band to the equilibrium price.

“Most of the new measures come into play only once the stock gets listed and won’t impact IPO subscription in a major way,” said Arun Kejriwal, director, Kejriwal Research and Investment Services.

The capital market regulator also made the cumbersome IPO forms more simpler and made it mandatory for investment bankers to start disclosing their track record.

MCX is the first offering to carry the performance of past issues handled by three of its lead managers — Edelweiss, Citi and Morgan Stanley. However, certain market participants said the small fonts used by bankers in displaying this information made it a near-impossible to read.

“The intent of Sebi is to provide information which can be read by all without using a magnifying glass. In case, the idea of merchant bankers is to just fulfill a requirement and use the minimum font size, it leaves a sour taste,” said Kejriwal.

The MCX offering will be the first IPO to come into the market after the major crackdown by Sebi on seven companies and merchant bankers for violation of IPO norms in December.

Experts say the success of the offering will be crucial for a revival in the primary market. It will also restore investors’ interest in the primary market. “The success of the issue could see another five or six companies coming out with their offerings in the next couple of months,” said Thunuguntla.