Context:
The Securities and Exchange Board of India (SEBI) is looking into the concept of introducing a controlled mechanism under which investors will be permitted to offer allotted shares even before the exchange-bound formal listing thereof. This step aims to prevent unofficial trading in postIPO grey market and create greater market transparency.
Important Features of the Proposal
- When Listed Facility
- SEBI plans to implement a system enabling trading of IPO shares in the threeday period between allotment and listing.
- This regulated mechanism would replace the need for informal grey market transactions providing a safer and more transparent alternative.
- Objective
- To formalize and monitor prelisting trading, ensuring investor protection and reducing price manipulation in the grey market.
Rationale Behind the Move
- Current Grey Market Practices
- IPO shares are frequently traded informally in the grey market where prices and transactions are unregulated increasing risks for investors.
- By creating a regulated platform SEBI aims to eliminate these risks while allowing investors to benefit from selling their shares prelisting.
- Investor Opportunity
- SEBI Chairperson Madhabi Puri Buch said that the investors who want to sell shares before listing should be given a proper regulated avenue to do so.
- Implementation and Ongoing Discussions
- SEBI is consulting with stock exchanges to design and implement the when listed system.
- Operational guidelines and frameworks including settlement processes and compliance checks will be crucial for ensuring the systems smooth functioning.
Benefits
- Transparency
- Eliminates opaque grey market dealings.
- Liquidity
- Increases opportunities for investors to trade IPO shares.
- Regulation
- Reduces risks of price manipulation and irregularities.
Challenges
- Designing an efficient settlement system for prelisting trades
- Ensuring that the mechanism does not adversely affect the IPO price discovery process.
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.
