The stock market regulator Securities and Exchange Board of India (SEBI) recently issued a circular for discovering the equilibrium pricing for public issues in case of a wide disparity between the prices discovered between the two exchanges — BSE and NSE — on the listing day. This change is useful as it helps iron out procedural difficulties. But the regulator should also use the current lull in the primary markets to take a closer look at the factors stoking speculative activity in this section.

The year 2021-22 witnessed record amount of fund-raising through public offers both on the main board as well as on the SME platform, amounting to ₹1,12,568 crore. Many of these stocks listed at hefty premium to the offer price and witnessed heavy oversubscription. But many investors who joined the IPO frenzy in 2021 are now holding loss-making positions. While IPO fund-raising has almost halved in FY23 with markets beginning to correct, the number of new issues have been higher, thanks to the continued interest in SME IPOs. Some corrective measures in the primary markets will help improve credibility of this segment. 

A special pre-opening session is conducted for stocks on the listing day during which listing price is discovered based on the price and quantity of the bids in the session. Since these sessions are conducted simultaneously on many exchanges, the listing price discovered across exchanges could vary and SEBI is now proposing a formula through which a single price can be arrived at, if the difference between exchanges is too wide. While this is a good idea, the regulator also needs to take a closer look at the trades transacted in the special session. Since there are no price bands in this session, trades can be executed far above the offer price, thus ensuring that the stock lists at a hefty premium. The trading data in this session needs to be scrutinised to spot circular trades by entities related to promoters or speculators. While the trade with maximum volume is taken as the equilibrium price, further checks are needed such as laying down a minimum number of investors executing trades at the equilibrium price and, perhaps, capping the extent to which the stock can list at a premium. 

The market regulator should also take a serious look at other illegal activities in the primary market such as, for instance, the grey market trading in IPOs which fuels speculative fervour. Similarly, there is also a market for investors to sell the IPO application before allotment or listing. Allowing such markets to exist and letting them freely disseminate indicative information on the internet is harmful for investors. The regulator also needs to keep watch over the activity in SME IPOs. The amount raised through these IPOs has more than doubled in the first 11 months of FY23 compared to the full year FY22. The number of issues has also increased, from 64 in FY22 to 104 in FY23. With the disclosure and oversight for these offers being lax, care should be taken that there are no malpractices in this category. 

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