PROPOSED POLICY FOR IMPOSITION OF PRICE BANDS ON THE DAY OF LISTING OF INITIAL PUBLIC OFFERS (IPO’s)

q Introduction

This is a proposal for imposing a price band of 25% on the issue price on the day of listing of IPOs of issue size upto Rs 250 Cr. This proposal does not apply in case of re-commencement of trading of the equity shares of a company on the stock exchanges.

q Background

Currently, the stock exchanges do not apply price bands on the day of listing of Initial Public Offerings (IPOs). The price fixed by the company in consultation with its lead managers is left open to price discovery in the matter and after the day of listing, this process of price discovery may continue within a price band of 20%. For IPO issue sizes that are greater than Rs.500 Cr, price bands are not imposed even after the day of listing if such scrips are available for trading on the derivative segment.

q Issue for Consideration

Recently, it has been noticed that there are significant price & volume spikes/ volatility on the day of listing of IPOs. This was particularly noticed in IPOs of issue size upto Rs 250 cr. 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.

While it is appreciated that demand /supply mechanics should freely determine the market price, large scale price/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.

The matter has been also deliberated at length in the meetings held with the stock exchanges. A back testing was also carried out by the stock exchanges on the IPOs during the past year, using parameters such as issue size, price variation on day of listing, maximum variation on day of listing as well as price variation on subsequent days. It was noticed that IPOs of issue size upto Rs 250 Cr exhibited more volatility than IPOs of greater issue size. After taking into account the views of the stock exchanges and the results of back testing, it was felt that there is a need to impose price bands on the day of listing of IPOs in a cautious and gradual manner to facilitate steady and sustained price discovery over a period of time.

Comments/suggestions are invited from the public on the above proposal, so as to reach SEBI by January 31, 2008.

Comments /suggestions may be sent by email to the following addresses

sanjayp@sebi.gov.in (Mr Sanjay Purao)

sapnas@sebi.gov.in (Ms Sapna Sinha)

A hard copy may also be sent at the following address:

Mr Sanjay C. Purao, Deputy General Manager

Integrated Surveillance Department

SEBI Bhavan, Plot No: C – 4A, G Block,

Bandra Kurla Complex,

Mumbai 400 051.

Home	Back

PROPOSED POLICY FOR IMPOSITION OF PRICE BANDS ON THE DAY OF LISTING OF INITIAL PUBLIC OFFERS (IPO’s) q Introduction This is a proposal for imposing a price band of 25% on the issue price on the day of listing of IPOs of issue size upto Rs 250 Cr. This proposal does not apply in case of re-commencement of trading of the equity shares of a company on the stock exchanges. q Background Currently, the stock exchanges do not apply price bands on the day of listing of Initial Public Offerings (IPOs). The price fixed by the company in consultation with its lead managers is left open to price discovery in the matter and after the day of listing, this process of price discovery may continue within a price band of 20%. For IPO issue sizes that are greater than Rs.500 Cr, price bands are not imposed even after the day of listing if such scrips are available for trading on the derivative segment. q Issue for Consideration Recently, it has been noticed that there are significant price & volume spikes/ volatility on the day of listing of IPOs. This was particularly noticed in IPOs of issue size upto Rs 250 cr. 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. While it is appreciated that demand /supply mechanics should freely determine the market price, large scale price/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. The matter has been also deliberated at length in the meetings held with the stock exchanges. A back testing was also carried out by the stock exchanges on the IPOs during the past year, using parameters such as issue size, price variation on day of listing, maximum variation on day of listing as well as price variation on subsequent days. It was noticed that IPOs of issue size upto Rs 250 Cr exhibited more volatility than IPOs of greater issue size. After taking into account the views of the stock exchanges and the results of back testing, it was felt that there is a need to impose price bands on the day of listing of IPOs in a cautious and gradual manner to facilitate steady and sustained price discovery over a period of time. Comments/suggestions are invited from the public on the above proposal, so as to reach SEBI by January 31, 2008. Comments /suggestions may be sent by email to the following addresses sanjayp@sebi.gov.in (Mr Sanjay Purao) sapnas@sebi.gov.in (Ms Sapna Sinha) A hard copy may also be sent at the following address: Mr Sanjay C. Purao, Deputy General Manager Integrated Surveillance Department SEBI Bhavan, Plot No: C – 4A, G Block, Bandra Kurla Complex, Mumbai 400 051.