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Sebi gets cracking on listing day price manipulations

BS Reporter  |  Mumbai 

Regulator introduces circuit filters and pre-open call auction for IPO stocks and relisted scrips on Day One.

The capital regulator, Securities and Exchange Board of India (Sebi), on Friday announced several measures aimed at checking manipulators and reducing wide fluctuations in the share prices of companies making their stock market debut.

At present, there is no limit on share price movements on the day of listing of shares following a public offer. This was allowed to enable price discovery but also leads to huge fluctuations on either side. From day two onwards, the circuit filters which cap stock movements to five per cent, 10 per cent or 20 per cent, depending on the size, come into play.

Sebi now plans to introduce this circuit filter on listing day itself. The new rules, to take effect four weeks from now, will include extending the ‘pre-market call auction’ window on listing day and delivery-based trading for the first 10 days.

“In light of the high volatility and price movement observed on the first day of trading, it has been decided to put in place a framework of trade controls for Initial Public Offer (IPO) and re-listed scrips,” said the regulator in a circular.

Further, for issues of Rs 250 crore or less, only delivery-based trades will be allowed for the first 10 days after listing. The pre-open call auction window, which currently is used for Nifty and Sensex stocks, will be used for arriving at an equilibrium price on the first day of trade of an IPO and re-listing stocks. However, unlike index stocks, where the window is for 15 minutes, IPO stocks will have a one-hour window between 9 and 10 am. The first 45 minutes will be for order entry, modification and cancellation, the next 10 minutes for order matching and trade confirmation, and the remaining five minutes shall be the buffer period to facilitate transition from pre-open session to the normal trading session.

In case the equilibrium price is not discovered for re-listed stocks, all orders shall be cancelled and the scrip shall continue to trade in the call auction mechanism until the price is determined. For IPO scrips with issue size of less than Rs 250 crore and re-listed scrips, a 100 per cent margin shall be required for the order to be eligible in the pre-open session.

Under normal trading, stocks with issue size of less than Rs 250 crore will trade in a price band of five per cent of the equilibrium price. For issues greater than Rs 250 crore, the price band will be 20 per cent of the equilibrium price. In case the equilibrium price is not discovered in the call auction, similar price bands linked to the issue price will be applicable.

Market experts said the move would definitely help reduce volatility. Arun Kejriwal, director at Kejriwal Research and Investment Services, said , “These were much-need steps. Introduction of trade-to-trade on issue size of below Rs 250 crore will help in reducing manipulation considerably, if not totally,”

“The immediate impact will be fewer issues. All operator-driven IPOs will be out,” said Pavan K Vijay, chairman, Corporate Professionals. “The process of trade to trade will hurt the market. No jobber will come. That will affect liquidity in the stock. Brokers who participate in IPO funding will also take a hit .”

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First Published: Sat, January 21 2012. 00:40 IST
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