Investors in the grey market sell within minutes of listing as the losses can balloon if the price moves against them.
Players who have bought Avenue Supermarts shares at a hefty premium in the illegal grey market, as well as high networth individuals who have bought shares on borrowed funds, are a jittery lot ahead of the listing of the shares on Tuesday.
For the HNIs, Avenue shares need to list around Rs 450—nearly a 50 percent premium to the issue price—for them to make a meaningful profit. Given the strong demand during the bidding period, it does look like there will be strong follow-up buying.
However, HNIs and players who have bought in the grey market sell within minutes of listing as the losses can be huge if they hang on to their position and the price moves against them.
In the case of HNIs particularly, it is the lenders who call the shots, as they have the power of attorney over the demat and bank accounts, having loaned huge sums. Whether the HNI likes it or not, the banks liquidate the shares as soon as trading starts.
For new listings, there is a price discovery session - known as call auction - for an hour, and the weighted average price in that session becomes the base on which the circuit filter will be calculated when regular trading starts.
Grey market premium of Avenue shares had gone as high as Rs 260 per share, with the result that investors who have bought at that price need to see a listing price of Rs 560 thereabouts just to break even (after calculating brokerage).
As can be seen from the 277 times subscription in the HNI segment and the crazy premium in the grey market, many are expecting the stock to list at a record premium to issue price—something that few high profile issues have managed to do in the past.
The stock exchange regulations says that for issues above Rs 250 crore, there are no limits for price discovery.
But exchange officials say there is an “operating range” of 75 percent during the price discovery session. This is to ensure that a few arbitrary bids do not skew the process. If there is heavy demand at the upper end of the 75 percent operating range, BSE and NSE officials jointly decide to relax the ceiling. However, if demand is not as heavy, the 75 percent ceiling stays.
Some traders who put in inflated bids during the call auction for Radio City shares last week found that the system refused to accept their bids.
If the 75 percent ceiling comes into effect for D-Mart, bids above Rs 523.25 will be rejected. And that could spell trouble for anybody who is looking forward to a breakeven price above Rs 524. Such players usually do not have the luxury of waiting for the normal session to find out if the stock price will climb higher.