Context:
The Securities and Exchange Board of India (Sebi) is considering asking exchanges to enable a “when listed” section on their platforms where initial public offerings (IPOs) may be traded in the period of three working days between allotment and listing.
Sebi’s Proposal
- When Listed Segment
- There is a proposed regulated segment on the exchanges for IPO allotments that can be traded between allotment and formal listing three days window.
- Objective
- The move aims at streamlining grey market trading promoting transparency and allowing an early cashout opportunity for IPO allottees.
- Benefits of the Proposal
- Transparency in Price Discovery.
- Gray market will no longer appear mysterious.
- Investors as well as analysts will be able to keep a track of the bid offer prices and volume data as exists in the case of secondary market trading.
- Grey Market
- Grey market goods are goods sold outside the authorized distribution channels by entities which may have no relationship with the producer of the goods. This form of parallel import frequently occurs when the price of an item is significantly higher in one country than another.
- Fair Valuation
- Probabilities of listing shares at unreasonably high premium due to untracked greymarket activity are reduced.
- The price would rise gradually and clearly in the when listed part
- Transparency on Taxation
- This will give an even better idea of the capital gains tax of IPO allottees who would be selling their shares right after the allotment process.
- Effective Monitoring of Market
- This provides an official method of tracking speculative trading to the investor and regulators.
Issues and Implications
- Speculation Might Linger
- While regulated trading might reduce the grey market speculation might continue to thrive through the formal channel.
- SME Segment Vulnerabilities
- The lightly regulated SME IPO segment needs further vigilance to ensure there is not too much speculation and resultant market distortions.
- Allotment to Listing Timeframe
- Sebi must consider reducing the window between allotment and listing to as low as one day.
- With advancements in technology it is possible to have faster settlement timelines further reducing opportunities for grey market speculation.
Background on IPO Activity
- IPO Activity Increasing
- 91 IPOs in 2024 consisting of the mainboard and SME raising over 16 trillion equivalent to 185 billion.
- Many IPOs saw more than 100 times oversubscription and lotterylike allotment scenarios.
- Grey Market Speculation
- Grey market activity is sourced from bumper listing premiums witnessed from respective allotments prior to being listed on the mainboard.
- Proposed when listed segment by Sebi is a very pragmatic approach to addressing the challenges of the grey market providing for a regulated and transparent trading space.
