Reduction in listing day manipulation in SME IPOs expected post opening price cap

This new regulation will take effect immediately, starting on July 4, 2024.

Bids for SME shares in the special pre-open session on listing day cannot be more than 90 percent of the issue price, the National Stock Exchange said on July 4. The rule will be applicable only to SME shares listing on the NSE’s Emerge platform, and is effective immediately.

"To standardize the opening price discovery/equilibrium price across exchanges during the special pre-open session for initial public offerings (IPOs) on the SME platform, it has been decided to put an overall cap of up to 90 percent over the issue price for SME IPOs," said the NSE in a circular. This new regulation will take effect immediately, starting on July 4, 2024.

What Prompted This Move?

In March, SEBI Chairperson Madhabi Puri Buch had said that the regulator had observed "signs of manipulation in the SME segment." Through 2023, SME IPOs were in the news for attracting record-breaking investments. A record 176 companies raised Rs 4,842 crore from the BSE SME and NSE Emerge platforms, with applications worth a record Rs 2.8 lakh crore submitted.

Experts attributed this problem mainly to manipulation of grey market prices, creating an illusion of scarcity and prompting investors to bid high prices on listing day.

In many cases, stock prices fell sharply after listing, as pre-IPO investors and associates of the promoter cashed out.

Here are some SME companies that have made more than 100 percent listing gains this year:

Fixing the problem

“NSE’s decision is commendable, as will reduce the pre-IPO rush,” said Kush Gupta, Director at SKG Investment and Advisory.

“Previously, there was a lot of activity suggesting that the opening price would be significantly above the IPO price. That will change,” Gupta said.

Impact on Smaller IPOs:

According to Gupta, prices of many SME IPOs were being manipulated by market operators in connivance with the promoters. He said that many promoters held shares through benaami entities even after the IPO, thus controlling the floating stock. “The new rule reflects an intent to reduce the malpractice in the SME IPO space and help it grow further,” Gupta said.

Reduction in Easy Profits:

“From 2023 onwards, approximately 40 percent of all IPOs were yielding 100 percent returns, making it almost a guarantee that investors would profit. This ease of making money was unsustainable. With the new regulations, participation might reduce slightly, as it will no longer be a given that one will profit from listing gains,” he said.

Curb in possible stock manipulation activities

"This is a welcome move aimed to protect the retail investors. The SEBI has been inserted this stringent regulations on the SME IPOs to ensure that stock manipulation in newly listed scripts are curbed and discovery of market price happens judiciously after listing of the stock, " said Abhishek Jhunjhunwala, Director of Ekadrisht Capital Private Limited.

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