Young Investor

Under the Radar: Price Manipulation in IPOs

RAJALAKSHMI SIVAM | Updated on November 19, 2011


Indo Thai Securities, a newly listed stock, opened on bourses at Rs 75 (issue price Rs 74) on the listing day. Within a few hours of trade it touched Rs 99, up 32 per cent from the opening price. But by the end of the day the stock had plunged to Rs 23, down a whopping 76 per cent from the day's high. So, what drove the stock price to gyrate so violently?

Was the stock underpriced on listing? Or was it so attractive that investors couldn't wait to own it? Well, for most part, it is unexplained and hence, speculative.

Imposing Circuit Filter

Considering that this isn't really a one-off incident, there have been many such listings in the recent past, it was only a matter of time before market watchdog stepped in.

With there being no mechanism currently to check a stock's price fluctuation on the listing day, the Securities Exchange Board of India is now considering imposing circuit filter on stocks from the listing day itself.

Would this help? Well, definitely given that wild gyration in stock price on the listing day has now become a given.

A look at the subscription pattern of IPOs in last ten months reveals some interesting information. Of the 28 stocks that came with an initial public offer between January and September this year, QIB (qualified institutional buyer) portion remained undersubscribed in 16 of them. However, these issues closed successfully with retail and non-institutional portion getting over subscribed.

More often than not, when institutional presence is small, it gets easy for large brokers and even some big investors to manipulate price.

Case in point - three months back SEBI took up a case of irregularity in the allotment process on the IPO from Vaswani Industries.

With SEBI's investigations revealing that there were irregularities in the issue's book building process, investors were given an option to withdraw their bids. It is to counter any manipulation of newly listed stocks that the securities watchdog is proposing to have circuit filters from the first day of trading of a stock. So, how does a circuit filter work?

The circuit filter is a ceiling fixed on the stock price. Both NSE and BSE have circuit filters on individual scrips (that are not traded in the futures and options segment). This can be from 5 per cent on penny stocks to 20 per cent on other scrips.

Circuit filter limits are set to curb wide fluctuations in stock prices in either direction.

Take for instance the stock of Eveready Industries, which has a circuit limit of 20 per cent in BSE. So if the stock price moves up by 20 per cent, the exchange will not accept any further buy order for the stock.

Sell orders, however, will be taken and the order will go through if there is a buyer.

Similarly, if Eveready Industries hits the 20 per cent lower circuit on a given day, the exchange will close the counter for sell orders below circuit limit; buy orders at that price however will be taken.

The upper circuit freeze will be lifted when there are more sellers than buyers (vice-versa for lower circuit freeze) on the stock.

SEBI will soon be issuing a draft paper on the subject of IPOs and will put it up for public discussion.

Published on November 19, 2011

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