SEBI for 25% price band on IPOs up to Rs 250 cr

Some forthcoming IPOs raising less than Rs 250 cr

MUMBAI: Stock market regulator SEBI has proposed a 25% first-day price band for IPOs up to Rs 250 crore, to enable “steady and sustained price discovery over a period of time”. Once enforced, a price-band will put off several punters and leveraged investors who borrow money to pocket the listing premium by selling the shares soon after trading begins, a practice that’s known as ‘first day first show’ in Dalal Street. Some forthcoming IPOs raising less than Rs 250 cr

The move has evoked a mixed response. “Why single out the smaller players... abnormal price movements have been witnessed in larger issues as well in the past,” said Prime Database MD Prithvi Haldea. “What needs to be addressed first, is the price discovery mechanism in IPOs. Second it is imperative that the free float is increased,” he adds. “If 75-85% of the market cap is effectively in large companies, why penalise small companies. What of the significant rise in DLF post its listing?” said an investment banker. SEBI has invited public comments on the imposition of circuit filters on the first day of listing of shares. At present, stock exchanges do not impose price bands on the day of listing of IPOs. The price fixed by the company , in consultation with its lead managers, is left open to price discovery. And, after the day of listing, there is a regular price band of 20%. This, however, would not apply to stocks which get relisted. For IPO issue sizes that are greater than Rs 500 crore, price bands are not imposed even after the day of listing, if such scrips are available for trading on the derivative segment. It may be recalled that the SEBI chairman had suggested a price band in April 2007 on the grounds that it would check any irregular movements in stocks. In the same month SEBI had banned seven brokerages from debut trading in newly-listed shares for their alleged role in huge price movements recorded in stocks like Cambridge Technology, Mindtree and Pyramid Saimira Theatre on their first day of trading. Some of these stocks witnessed unprecedented jump in their share prices immediately after the listing. In a note on Thursday, SEBI said it has been noticed that there are significant price and volume spikes/volatility on the day of listing of IPOs. This was particularly true of IPOs which were below Rs 250 crore.

For several such IPOs where the stock is available for trading in the hands of public, after excluding shares of promoters and others that face a lock in period, is 25-30% of the equity capital of the company, the price may not sustain on subsequent days. This may disappoint long-term investors, said SEBI.

While it is appreciated that demand/supply mechanics should freely determine the market price, large-scale price/volume fluctuations on the first day of trading seem to warrant a systemic response to contain such sharp movements. Accordingly, there seems to be a need to consider a price band even on the day of listing of IPOs. This would not only assist in a more orderly price discovery process over a period of time, instead of on the day of listing, but more importantly also have a salutary impact on potential abnormal price movements on the day of listing,” said the Sebi release. The matter was deliberated at length with stock exchanges. It was found there was price variation on the day of listing as well as on subsequent days. The regulator said it was noticed that IPOs of issue size up to Rs 250 crore exhibited more volatility than IPOs of greater issue size. After taking into account the views of stock exchanges, it was felt that there is a need to impose price bands on the day of listing of IPOs in a cautious manner.