25% Price band limit on listing IPO

Some good (or rather bad) news from SEBI for the hungry IPO investors looking to make a quick buck in the IPO application process and making good profit on the very first listing day:

SEBI is proposing to place an UPPER LIMIT on the maximum price a newly floated company can hit on the very first day of listing. The upper limit proposed is 25%

This is just a proposal, what may be implemented and when, is a different issue altogether.
Then, another restriction is that this is proposed only for the relatively smaller companies, not the bigger ones. The proposal from SEBI is for the companies which come out with an IPO which has a total IPO value of less than 250 crores.

The reasoning:
Sebi says that in the past there have been many cases where the listing day price of relatively smaller company IPOs was attempted to be manipulated by a large number of brokers, who made an enormous profit on the listing day, and later eloped.

As an example, in April 2007, SEBI had banned seven brokerage houses from debut trading in newly-listed shares for their alleged role in huge price movements recorded in stocks like Cambridge Technology, Mindtree and Pyramid Saimira Theatre on their first day of trading. Some of these stocks witnessed unprecedented jump in their share prices immediately after the listing.

On one hand, this restriction would mean that for a IPO that is offering shares at 100 Rs. and the entire offer size is less than 250 Crores, then the maximum hike the listing day price can hit is 125 (i.e. 25% higher only). Sebi says that the proposal is justified because it will give enough time for the market to come to its senses regarding the justified price of the newly listed company, and will shield the smaller investors who may end up buying the shares of a newly listed company at a very high price on the listing day, as they may expect further rise in prices in the coming day – all due to euphoria.

However, market participants and analysts differ in view. They say that IPO process runs for a couple of days. People are given chance to bid, that way they themselves take the decision about the price of the share. Secondly, why only the small companies are being hit by this proposal? Why to leave out the biggies, ultimately following the principle of making rich richer and poor poorer.

Sebi’s offer seems justified to me. The euphoria that goes on on the listing day is no good.
Sebi’s proposal is justified on the point that the smaller issue prices are easier to manipulate – especially on the listing day. Hence, at the end of the day, it is the retail investor whose fingers get burnt. Secondly, the proposal is not about IPO price decisions. It is more about controlling the euphoria in the stock market while people buy stocks on the very first day, thinking that it will rise further.

I remember the case of Biocon IPO, which went up on first 1 or 2 days and then went down significantly. It was the retail investors like me who applied for the IPO, did not get any shares, and bought high priced shares on the listing day with an expectation to make a good buck within a few days, but ended up loosing money.

If the stock is good to double or quadruple the price on the listing day itself, then it should not matter if it takes 4 days to reach the double price (4 days * 25% each day) or 8 days to quadruple. I agree with SEBI that instead of letting the price determination done on the very first day, let it be spread over a few days. That will give more stability and control on the prices and things can be easy to regulate.

However, if this proposal is implemented, then it will significantly hit the people who take loans to apply for IPOs. As the listing price will be limited, even if the IPO is good, it will take enough days for them to realize their desired profits - covering the interest of the loan and their expected profits above that interest. Sebi is currently inviting proposals and suggestions from various market participant. Let’s see what lies ahead in the future.

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