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Thursday, March 8, 2012

SEBI has introduced new norms to be followed in case of listing of all new IPOs. The recently concluded MCX IPO would be the first one to be subjected to the new regulations on the listing day. Let's try to understand how these regulations may affect the listing price movements of MCX and future IPOs in the Indian market

According to the new norms mandated by SEBI for IPOs, investors must note that the shares offered under the IPO on the listing day, would initially go through a pre-open session period which will last for an hour between 9:00 AM and 10:00 AM. During this period, investors would be allowed to punch in orders, modify them and/or cancel them during the first 45 minutes, i.e. upto 9:45 AM. The rationale behind such a move is aimed at protecting the interest of the retail shareholders from artificial price-rigging on the bourses.

However, the one crucial aspect of the new norms introduced by SEBI states that all the IPO listings on the bourses would be controlled by circuit limits right from the listing day. According to SEBI regulations, in case the equilibrium price (price at which the bid rate matches with the ask rate) is discovered during the pre-open session, the price band for normal trading session shall be 20 per cent of the equilibrium price. In case the equilibrium price is not discovered, then the 20 per cent circuit limit would be applicable on the issue price. While the above mentioned rules are in place for companies with issue sizes in excess of Rs 250 crore, the ones with issue size up to Rs 250 crore would have set circuit limits of 5 per cent either on the equilibrium price or the issue price as stated above.

Thus, since MCX falls in the bracket of Rs 250 crore and above, its shares would trade within the range of 20 per cent either on the equilibrium price or on the issue price. If in case the equilibrium price is not met during the pre-open session and the issue price becomes the trade open price during the normal hours, then the price would be restricted within a range that can hover upto 20% on either side of the Issue Price, i.e. the price cannot go in excess of Rs 1,238 per share on listing.

If in the first hour of trade, MCX gets a base equilibrum price of Rs.1,400, then the stock price can hover 20% on either side, i.e. in the range of Rs.1,120 to Rs.1,680 during the rest of the trading session. If the base price is discovered at Rs.1,500, then the stock price can roam around in the range of Rs.1,200 to Rs.1,800 and so on

Hence these norms would imply a cap on their expected gains (as well as losses!) on the listing day. While, the pre-open session is expected help cater to the unreasonably high volatility and price movements witnessed on the first day of listing in case of many IPOs, it remains to be seen how the regulation actually works out. Stay tuned to Indian IPO Blog for the latest happenings in the IPO market in India

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