The flurry of initial public offers in August and September this year and the spectacular listing gains they delivered had evoked fear of another speculative binge in primary markets. But the relatively dull listing of the Shemaroo Entertainment stock has allayed these apprehensions.

It is unlikely that the Indian primary markets will witness speculative excesses similar to what was witnessed in the mid-nineties or in 2010 and 2011, when listing gains were assured in almost all issues. Various measures initiated by the market regulator, the Securities and Exchange Board of India (SEBI), in 2012 have closed almost all avenues for fly-by-night operators to make a quick buck by duping investors in public offers.

Yet, the movement of Snowman Logistics and Sharda Cropchem stocks on listing day raises doubts about whether all the loopholes have been plugged.

Resurgent speculation

It all began with the Wonderla Holidays’ public offer. The amusement park company sought to raise ₹181 crore from the market. But it received bids worth 38 times that amount. Blame it on the pent up demand for public offers since there had been just two good offers in 2013 — Just Dial and Repco Home Finance.

The stock performed brilliantly on its debut; gaining 25 per cent on the listing day. It then went on to gain 170 per cent in the next four months. Since the listing was in May, the post-result euphoria in the stock market could have contributed to this rally. For the stock’s fundamentals did not justify this performance.

The movement of the Wonderla stock rekindled investor interest in IPOs. Three IPOs followed thereafter — Snowman Logistics, Sharda Cropchem and Shemaroo Entertainment. The first two offers received a thumping response, getting oversubscribed over 60 times. The performance of these stocks after listing was also very good; Snowman gained 65 per cent on the listing day while Sharda Cropchem gained 48 per cent.

But the enthusiasm for the new listings fizzled out soon after. The Shemaroo offer was oversubscribed only 7 times and it made zilch returns on the listing day. It is more than a month since the stock listed, and it is currently ruling below its offer price.

Clamping down

How was the frenzy checked? Well, SEBI had already done the ground work for cleaning up the primary market in late-2011 and early 2012. It may be recalled that similar speculative excesses were apparent in the primary markets in 2010 and 2011 when many dubious companies made offers and the stock prices zoomed after listing, giving flipping gains to everyone who invested in them. An investigation launched by SEBI in the post-listing price movement resulted in a series of measures.

SEBI barred seven companies, including PG Electroplast, Brooks Laboratories, RDB Rasayans and Taksheel Solutions, from transacting in equity markets and raising funds from markets for a certain period in December 2011. These firms were allegedly guilty of offences such as using the IPO proceeds for purposes other than what was stated in the prospectus and making inadequate or even false disclosures.

It was also found that in some companies, the IPO proceeds flowed through many layered transactions into accounts of stock market intermediaries. These intermediaries, in turn, used the funds to manipulate the stock price in the period after listing.

The regulator had also punished three investment bankers managing these issues and issued guidelines for investment bankers, including asking them to publish their track record on their websites. These orders against the companies and investment bankers brought the dubious public offers to a complete halt by 2013.

Another important measure initiated by SEBI in 2012 was the introduction of call auctions on the listing day. These are one hour-sessions before regular trading starts, on the listing day. Here the orders are matched and the listing price is discovered based on the volume in the call-auction session.

Once the stock is listed at the discovered price, a circuit filter is applied on the stock, depending on the size of the issue (5 per cent for issue up to ₹250 crore and 20 per cent for issues bigger than ₹250 crore). This filter is applied for 10 sessions after listing too. These filters are aimed at checking runaway price movement of stocks immediately after listing.

SEBI’s push towards improving its vigilance through the Integrated Market Surveillance System (IMSS) is another deterrent to stock price manipulators.

Recent orders such as the one against Factorial Master Fund show that the regulator now has the means to track suspicious transactions and identify those behind such orders, with ease.

What is missing?

These measures did have the desired effect of clamping down on speculation. But the regulator almost threw the baby out with the bathwater. The number of public offers has dwindled significantly in recent years. The primary market is picking up now, but so is speculation.

So what is lacking in the changes made by the regulator? One area where the rules were a little lax is in the pre-listing call auction. The new rules stipulate that there shall be no price-bands in these sessions. In both Snowman Logistics and Sharda Cropchem, the price discovered in the call-auction was substantially higher than the listing price.

The price is discovered in this session based on the volume of the buy and sell orders punched in by investors. It is therefore apparent that it is possible to jack up the listing price by punching in both buy and sell order from different accounts. SEBI can perhaps consider putting a price limit for this session too, maybe 20 per cent, to halt irregular practices.

A close scrutiny of the orders put in the pre-listing session in these stocks might also reveal some interesting insights on what went wrong with SEBI’s checks.

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