IPO blues

The Securities and Exchanges Board of India (SEBI) needs to keep an eye on the unusual level of activity in the primary market of late. A vibrant primary market is necessary to enable corporates to raise funds, but excessive speculative activity in this segment can have negative consequences. Many of the new investors who had opened new demat and trading accounts to begin trading during the pandemic appear to be making leveraged bets in initial public offers. This is evident in the large oversubscription of the retail portion of some recent offers such as Mazagon Dock, Chemcon Speciality Chemicals, Route Mobile and Happiest Minds Technologies. The strong listing day gain in many these issues seems to be spurring investors further towards primary issuances.

While a larger pool of investors for primary offers is desirable, the regulator needs to ensure that there is no fraudulent activity taking place in this section that can destroy investors’ trust. There have been numerous scams involving primary offers in equity in the past wherein the promoters along with market intermediaries have placed unlisted shares with investors with the promise of strong gains on listing. To stem these malpractices, SEBI had put in numerous checks on IPOs in 2012, including stipulating circuit breakers immediately after listing, moving smaller issuances to trade-to-trade category to check speculation, and finally, stipulating a pre-opening session on the listing day to discover the price based on demand and supply. These measures have been successful in checking price manipulation on listing day to a large extent. But some gaps remain. One, there is no circuit limit in the pre-opening session on the listing day which allows stocks to list at a massive premium to their offer price. A check on the discovered price in this session may help runaway speculation regarding listing gains.

Two, it is unclear why the market regulator is allowing a grey market for initial public offers to function, where the IPO applications are traded over the counter. These transactions are unregulated, but the premium at which the applications trade is used as a lure to indicate the listing gains that can be expected from the issue. Given that issues such as Mazagon Dock, Chemcon Specialties and Happiest Minds have been oversubscribed almost 150 times the issue size, SEBI needs to clamp down on these illegal market places soon. Small investors, who are generally the last to enter the market, are the worst affected once prices reverse, destroying their trust in the market ecosystem.

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