In order to curb excessive speculation and volatility of a stock at the time of listing, market regulator Securities & Exchange Board of India (Sebi) has proposed a 25% price band on the issue price on the listing day of an IPO up to Rs 250 crore in size. This would not apply in case of recommencement of trading in equity shares of a company on the stock exchange.
Providing the background of the proposal, Sebi said that currently, stock exchanges do not apply price bands on the day of listing IPOs. The price fixed by the company in consultation with its lead managers is left open to price discovery and after the day of listing, this process may continue within a price band of 20%. ?For IPO issue sizes that are greater than Rs 500 crore, price bands are not imposed even after the day of listing if such scrips are available for trading on the derivative segment,? a Sebi circular stated.
Sebi said that recently, it had been noticed that there were significant price and volume spikes or volatility on the day of listing IPOs . This was particularly noticed for IPOs of issue size up to Rs 250 crore. ?In particular, for several such IPOs, where the stock available for trading in the hands of public, after excluding shares of promoters and others that face a lock-in period, is about 25-30% of the equity capital of the company, the price may not sustain on subsequent days leading long-term investors to become dissatisfied with the dramatic activity on the day of listing,? Sebi said.
The markets watchdog said that while it is appreciated that demand or supply mechanics should freely determine market price, large-scale price or volume fluctuations on the first day of trading seem to warrant a systemic response to contain such sharp movements.
?Accordingly, there seems to be a need to consider a price band even on the day of listing of IPOs. This would not only assist in a more orderly price discovery process over a period of time, instead of on the day of listing, but more importantly also have a salutary impact on potential abnormal price movements on the day of listing,? Sebi said.