No grey areas: Regulated trading before listing will increase transparency

The Securities and Exchange Board of India (Sebi) is considering asking exchanges to enable a “when listed” section on their platforms where initial public offerings (IPOs) may be traded in the period of three working days between allotment and listing. This is to regularise grey market trading in such shares. The current situation leads to rampant “off-the-books” speculation during that period of hiatus. Sebi Chairperson Madhabi Puri Buch said that a “when listed” section, which allows allotments (rather than the shares themselves) to be traded in organised fashion, would allow a primary investor who received an allotment in an IPO to cash out immediately by selling it in a transparent transaction, without waiting for formal listing and trading of the shares. Such trades of allotments could then be regularised by changing the names of the shareholders as appropriate once the share is listed on the secondary market.

 

This would be an improvement in some respects on the current situation. Transaction prices on the grey market are opaque and impossible to verify. This concept would, therefore, enable better price discovery for investors and analysts, assuming the bid/offer prices and volume data in the “when listed” section are visible, as is the case in secondary-market trading. Also this would probably mitigate the situation where shares are suddenly listed at huge premiums due to the lack of a mechanism to track grey-market price movements. Price appreciation in the “when-listed” section would be reflected as they occur, rather than being captured in one shot on listing day. Such a mechanism would also clarify the tax payable in instances where IPO allottees instantly cash out for capital gains. However, such a measure would not necessarily curb speculation but, in conjunction with other measures to regulate the primary market, especially the lightly regulated segment of small and medium enterprises, it would enable investors and authorities to monitor the market better. Besides, if Sebi reduces the time window between allotment and listing, this could also impose another constraint upon grey market speculators in that they would get less time to carry out their operations.

 

Given the improvement and adoption of technology, which has helped reduce the time for settlement in the Indian stock market, the regulator must look for ways to reduce the time between allotment and listing, preferably to one day. Overall, the IPO market has seen very high and increasing activity over the past 18 months, with IPOs on both the mainboard and SME (small and medium enterprises) segment attracting strong investor interest. In 2024, 91 companies raised a staggering Rs 1.6 trillion ($18.5 billion). Multiple issues have seen 100 times subscription, which means that an allotment was like winning a lottery. As a result, many stocks have listed at high premiums to the issue price. In turn, bumper profits for allottees have led to even more interest being generated, and this has led to a surge in activity in the grey market where an allotment can be traded even before listing. That rationale for the new proposed segment is simple enough: If investors wish to trade within this window, they should be allowed to do so on a regulated space. It is a pragmatic approach.