SEBI might impose price band on IPO listing day

After observing the volatility of price and volume of IPOs of different issue size, SEBI analysed the movement using parameters such as issue size, price variation on the day of listing and the variation on subsequent days. The analysis gave a clear indication of the pattern – a quite high volatility on listing day which was not sustained after that specially for issue size up to 250 crore. The regulator is looking at imposing a price band of 25% on the issue price on the day of listing for IPOs up to issue size 250 crore. The decision is yet to formalize and SEBI is waiting for comments and suggestion from public on this proposal on or before January 31.

This proposal will be welcome news for the long term strategic investors. These investors decide on investing on particular stock after an in-depth analysis of the business of the company. The high price on listing day which could not be sustained on subsequent days, disappoint such investors and might prompt them to book profit on listing day. Steady and sustained price discovery will make the investment fair and attract strategic investment.

On the other hand those retail investors, who do not have much ideas of the business of company and bid mostly on last day after looking at the number of times stocks is oversubscribed, might be discouraged. If a stock gets oversubscribed 10 times in retail segment then even after bidding for 1 lakh (maximum limit for retail investor), one is expected to get shares worth 10,000 Rs. With an upper cap in price on listing day to 25% this investor can not expect more than 2500 Rs return, that is effectively on his 1 lakh investment (as the amount of unallocated shares comes back only a few days before listing). Thus a 2.5% (2,500 of 100,000) return on 20 days (average time from the day of bidding closure to listing day) even in bullish market condition while investment in secondary market could easily fetch 10-15% return.

SEBI needs to look on this step from different aspects for a fair movement in market. One solution for this could be investing a part of total bid rather than full amount. Recently Reliance Power IPO had given option of investing 25% of total bid size. With retail getting subscribed for more than 15 times and Mr. Anil Ambani’s approach to give shares to all retail bidders, the 25% investment will cover the amount required for the allocated shares. The regulation is expected to come in next month and suggestion prom public could help SEBI in taking a pragmatic decision without hurting anyone.