The market regulator Securities and Exchange Board of India (Sebi) is working towards curbing stock price gyrations in companies making their stock market debut. The regulator is in discussions with the stock exchanges for implementation of pre-call auction in IPO stocks, according to people with direct knowledge of the development. A pre-call auction is the process of determining opening price of a stock based on initial bidding prices. According to sources, the pre-open call auction for IPO stocks could get implemented in the next few months.
Extension of call auction mechanism to IPO stocks is a part of Sebi initiatives proposed for the year 2011-12 which a part of regulator?s efforts to develop a risk free and fair marketplace.
?It (pre-open call auction) is a great way to manage volatility at the opening,?said Sayee Srinivasan, head-product strategy, Bombay Stock Exchange (BSE).
In the recent past, companies during listing have seen huge fluctuation in their share price, amid hectic activity by traders as investors, who invested in the IPO, look to make quick gains and exit. For instance, the stock of Shilpi Cable, which got listed earlier this month, first went up 23% then dropped 31% from its issue price, finally settling 30% lower. That’s very much the case with a lot of IPO stocks on listing day, the trend is more imminent in smaller companies.
The pre-open call auction session is carried for 15 minutes between 9 am and 9.15 am. The process consists of order entry, order matching and trade confirmation.
Currently, pre-open call auction is allowed in all-exclusively listed stocks on the BSE, while on the NSE it is restricted to the index stocks in Nifty.
However, some market experts feel introduction of pre-call auction in IPO stocks will only reduce volatility in the opening trade and won’t solve the problem of vast price fluctuation that a stock witnesses on the day of listing. Some are proposing steps like putting a IPO stock in the trade-to-trade segment, in which intra-day trading is not allowed, on day one.
?Pre-open call auction won’t solve the problem of first-day price fluctuations. If IPO stocks are put in trade-to-trade segment on day one that could help in bringing down price volatility substantially,? said Rajendra Kanoongo, president, Ashika Capital.