Given the small size of the issues, operators get into the act by cornering a significant chunk of shares, pumping up the price and volumes at the counter, and then dumping them on unsuspecting investors. Market watchers say that, often, the operators are in cahoots with the merchant bankers to the issue and, in some cases, with the promoters of the companies as well. The operation is usually completed in less than a month after the listing of shares.
According to market participants, trying market conditions make it difficult for most small-sized companies to raise money from genuine investors. Sensing the opportunity, promoters are approached by market operators and the entire issue management is said to be handed over to the dubious players after agreeing to terms and conditions.
Many operators are Ahmedabad-based and have the resources and network to subscribe to the entire issue, if required. They also control dummy companies overseas masquerading as institutional investors. Through various entities, the operators corner a substantial chunk of the public issue. This also ensures there is not much selling pressure on the day of listing.
Market watchers say that in some cases, the issue is subscribed by only a handful applicants. "One of the latest issue had only six qualified institutional investors, and 93% of the issue was subscribed by only nine investors. Now, you can image the control that the investors have on the listing price of the stock," says a market analyst.
The operators also manipulate the ongoing premium on the stock price in the grey market prior to listing. In many cases, merchant bankers promise the moon to the promoters, and grey market manipulation is one of ensuring that the prices approach the promised levels.
On listing, the stock price shoots up and immediately attracts attention. Day traders jump into the fray, pushing up volumes further and improving liquidity. Some of the buyers include genuine investors who could not get the required IPO allocation and buy into the stock, and other fall prey to the rumours.
Once the share price starts shooting up, operators start spreading rumours about dizzying targets the stock is likely to touch. This triggers off a self-fulfilling prophecy with more investors jumping in for a piece of action. At the same time, there are some institutional investors who are ready to buy into these stocks, purely from a short-term perspective. Market participants say that stronger the operator, the more of number of days he can support the stock price.
In case of many new listings this year, the current ruling price of many small IPOs have gone down more than 50% from their recent highs. Part of the blame could be put on the bad market. But then, market conditions were not buoyant when the stocks listed, and yet they managed to post superb returns in the initial days.