25 per cent price band on listing day

Move to check volatility in share prices of small-cap companies.

In a move to check significant price and volume spikes on listing days, the Securities and Exchange Board of India (Sebi) on Thursday put out a draft policy for imposing a price band of 25 per cent on the issue price for initial public offers (IPO) of issue size up to Rs 250 crore.

The proposal, which is open for public comments till January 31, does not apply in the case of re-commencement of trading of a company's shares.

The proposal has been put out after Sebi observed that in case of several such IPOs where the stock available for trading, or the free float, is about 25 to 30 per cent of the equity capital of the company, the price does not sustain on subsequent days, leaving long-term investors to become dissatisfied with the dramatic activity on listing day.

"This would not only assist in a more orderly price discovery process over a period of time but, more importantly, also have a salutary impact on potential abnormal price movements on the day of listing," said the policy.

"This is mainly a protectionist measure for the retail investor who takes positions mainly for listing gains. High net-worth individuals and qualified institutional buyers, in any case, buy in a bulk segment which can sway the market either way," said an investment banker.

Accordingly, the stock exchanges carried out back testing on IPOs during last year, using parameters such as issue size, price variation on listing day, maximum variation on listing day as well as price variation on subsequent days.

"It was noticed that IPOs of issue size upto Rs 250 crore exhibited more volatility than IPOs of greater issue size. After taking into account the views of the bourses and the results of back testing, it was felt that there is a need to impose price bands on the day of listing in a cautious and gradual manner to facilitate steady and sustained price discovery over a period of time," said the draft policy.

Currently, bourses do not apply any price bands on the day of listing. The price fixed by the company in consultation with its lead managers is left open to price discovery and after the listing day, this process of price discovery may continue within a price band of 20 per cent.

For IPOs greater than Rs 500 crore, price bands would be not imposed even after the day of listing if such scrips are available for trading on the derivative segment.