Activity in Pre-IPO trading grey market a valid concern but a “pechida” problem to solve, says Sebi Chairman Madhabhi Puri Buch

Buch pointed that one of the strategic intention behind the reduction of the settlement time from T+6 to T+3 was to bring down the kerb trading.

Sebi Chairperson Madhabhi Puri Buch said the heightened activity in the grey market pre-IPO is a “very valid concern” but a “pechida” (complicated) problem to solve. “Pre-IPO activity in the gray market is a very valid concern. This is what I would call a pechida problem. There is a certain facilitation that we have under the Act, wherein everything that applies to listed companies is actually “for listed as well as to be listed companies”. Under the law “to be listed” means a company should have formally started a process to get itself listed. “It is a delicate space which we will not go into without floating a consultation paper,” she said.

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With the avalanche of IPOs that are hitting the market continuously, promoters and private investors have allegedly been exploiting the gray market to drive up prices to justify a higher base case to price issues. Gray market prices therefore become the anchor around which issues are priced with investors taking a cue from the unlisted market to determine what kind of demand, and therefore listing gain, a public issue may offer. This is one of the key factors seen as driving overpricing of issues.
The Sebi chairperson, in an interaction with women journalists on March 11, said “this is a very valid concern”.

Besides, Buch pointed that one of the strategic intention behind the reduction of the settlement time from T+6 to T+3 was to bring down the kerb trading. "One of the strategic intents of reducing this settlement time was (to reduce the functioning of the grey market)... why wait for the grey market to operate for six days, right? By cutting it short, you have started the trading in the regulated market sooner," she said.

Buch said that the regulator has adopted an attitude of trying to accomodate a massive need in the market, instead of trying to clamp down on it. "If investors want it, we think why not bring it into the fold of the regulated market (with proper risk management) instead of prohibiting it and unleashing an enforcement action. This is the approach (of accomodation) we have taken with small and medium REITs and finding a new asset class between PMS and MFs," she said.

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On the overall issue of the influence of the opaque practices of private markets on the public markets, and therefore on the listing prices, Buch said that this is a problem that is being recognised globally. She said that wherever there is an interconnectedness and it bears thinking about.

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