There has been rampant rigging of many of the newly listed small IPOs over the last two years. Capital markets regulator SEBI is in the process of reforming the initial public offer to ensure minimum price volatility on the day of listing.
Prithvi Haldea, CMD of Prime Database has lauded SEBI's move as it would help prevent the extreme volatility in price on either sides which takes place on the day of listing because of manipulation and not because of true market price discovery. Below is an edited transcript of his interview. Also watch the accompanying video.
Q: What do you make of those moves like allowing only delivery based trades for the first ten days, 100% margin required for the pre-opening session? Do you think it will correct some of the anomalies of the small IPOs that got listed last year?
A: I think it is a significant move because the subject of huge IPO price volatility has been under discussion and debate for several years and we have seen scrip gaining 70-80% or dropping 70-80% on the listing day. This kind of volatility was brought up in the media significantly and it is something that was of a concern. Before we move on to discuss this subject we should believe and understand that there has to be volatility in IPO listing because of the sheer fact that the IPO price is decided by the issuer; in fixed price it is a single price, in a book building, it is a price band. But in both cases it is the issuer which decides the price and ultimately on the listing date the market discovers the right price and therefore there can be movements on either sides on the listing date.
Given this, there have been many examples in the last one year where the prices have not only gone up but also gone down significantly and therefore is that true discovery or is there manipulation taking place. There have been examples like Jubilant which gained 60% on the listing date compared to the offer price but the price significantly only moved upwards and not downwards. But there have been cases in 2011 where we saw movements on either sides and what SEBI has done is very interesting in terms of providing not for a single simple circuit filter on day one which would have prevented true price discovery.
What it has done is it has created a pre-open call auctions mechanism where you have one hour window to place orders and match orders and after that it would move into the normal trading platform and then you have the circuit filters of two kinds; one below 250 crore issues and the other for more than 250 crore. So what it is going to do is to prevent the huge movements on either sides which take place substantially because of manipulation and not because of true market price discovery, and to that extent, it is a good move. Q: On that issue size though of 250 crore, do you think adequate provisions have been set in for the smaller issues or do you think they can be easily sidestepped?
A: I think the merchant bankers and the issuers of small issues, which have been manipulated are now on high alert. They know that they cannot get away with the kind of misleads that they blatantly used during the last couple of years.
So in any case, they are going to be under much more significant watch. Issue size of 250 crore is the right number that can be debated but you have to put some number somewhere. Probably this is more prompted by the fact that the last one year has seen almost 90% of the issues below that size and those are the kinds of issues which has seen the most volatility. We should live with this number until more IPOs come to the market which is something that should worry us more and we test out these guidelines.
I am sure that they would be new discoveries in terms of either loopholes or market trying to manipulate the prices in a different way and SEBI would be very keenly watching and looking at how to prevent any of those things happening.
Q: Do you expect to see any large big ticket government paper hitting the market soon using the new norms which were set out a few weeks back?
A: I hope so. There have been hardly any issues for the last one year and the market is looking forward to some good issuances. PSUs do offer some good paper, strong companies, large companies, monopolies, near monopolies and we are now hearing that there could be couple of IPOs before March. In addition to that, the IPP programme was substantially designed to take care of the government divestment programme, besides of course, also aiming at the private sector companies which wanted to increase their public shareholding. I hope that there should be at least two-three issuances before March using the IPP route and there would again be a need for review of these guidelines as we go along. We have seen that SEBI has been proactive in terms of changing the guidelines or improving the guidelines but I am sure some issues should take place in the next two-three months.
