It's pack-up time for many operators in the equity market, whose covert business model of share price manipulation of debutante stocks is being disrupted by the Securities and Exchange Board of India (Sebi).
For many years, share price rigging of newly listed companies was a thriving business for some traders and brokers in the absence of any circuit breakers for scrips on the listing day. That will no longer be the case for Initial Public Offers (IPOs) listing on exchanges in four weeks from now.
New Sebi rules say the stock of a company which has raised less than Rs 250 crore through an IPO is to attract a circuit filter of five per cent and no speculative trading will be allowed in the counter for the first 10 days, as physical delivery will be compulsory. For companies that raise more than Rs 250 crore, the stock would attract a 20 per cent circuit filter.
Stock brokers in Mumbai and Ahmedabad, where a large number of manipulation cases have been detected, say such a rule was much feared. "No operator would want to take a risk, as circuit filters would make it difficult for him to exit the counter at a decent profit. Manipulators knew that once the stock rose sharply, investors would be attracted and they could exit. However, now investors know the stock may not move up sharply due to circuit filters and they would not be attracted to companies that are not fundamentally sound to invest. This will improve the situation a lot," said a broker from Gujarat.
Rigging the share price to gain investor attraction and exit was the favourite method of these operators. First-day volumes in newly listed companies were over 10 times the total shares offered in most cases. This gave a clear indication of artificial trading.
IPOs in the past two years have performed worse than the broader market. Even if one looks at the number of IPOs that delivered positive returns, investors seem to have lost.
The IPOs of RDB Rasayans, Gyscoal Alloys, Sea TV Networks, Tirupati Inks, Aster Silicate, Cantabil Retail, Commercial Engineers & Body, Tarapur Transformers, Microsec Financial, BS Transcomm, Servalakshmi Paper, Brook Laboratories, Bharatiya Global Infomedia and Midfield Industries were among the top losers. These fell 50-80 per cent from their respective offer price. All these companies had raised below Rs 250 crore.
While the current financial year saw few IPOs, the overall loss to IPO investors during financial year 2010-2011 was estimated to be in excess of Rs 3,600 crore, excluding the gains from the Coal India issue. Nearly 70 per cent of the 53 issues listed during ths period fell below their issue price.
Often huge volatility made retail traders eager to make a quick buck bet on the counter, bu they would invariaby lose. Such losses due to manipulative practices ensured a strong disincentive in re-entering the market and participation from the retail segment declined severely. Sebi's recent move may, therefore, go a long way in improving retail participation.
Sebi has also said that a pre-open call auction window will be made available for newly listing stocks. IPO stocks will have a one-hour window between 9 and 10 am. This will give an idea to traders as to what would be the fair price of a newly listed company, say analysts.
Also, both rules of circuit filter and call auction are applicable to the re-listing of suspended companies. There are about 1,500 suspended companies on the Bombay Stock Exchange. The case of re-listed companies has been similar to IPOs till now, with their stock prices also rising sharply on the first day. Since these are penny stocks, rigging was even easier.
