The majority of stocks see excessive volatility on the day of listing, justifying the Securities and Exchange Board of India’s (Sebi) move to look into the matter. On Tuesday, Sebi chairman UK Sinha reiterated his concerns about the high volatility in stocks on the listing day and said the regulator would be initiating a probe into the matter.
Data put out by Bloomberg, on the IPO listings of 2011 substantiates the view . As many as 28 out of 36 stocks, or 75%, which debuted in the secondary market saw a first day positive or negative price movement of 20%. Indeed, it has been seen that volatility in price movements on debut tends to be significantly higher when compared to that of the market itself. A comparison between the two reveals that more than 40% of the debuting securities saw a greater than 40% price swing on the day they listed.
B Madhuprasad, vice chairman, Keynote Corporate Services points out that recent IPO listings have been particularly volatile, with five out of six stocks which listed in the period since October witnessing more than 60% price swings on the listing day. ?While it can be argued that investor interest generally drives price volatility on the listing day, recent listings have turned out to be a risky preposition for the investors,? Madhuprasad said, pointing out that the absence of a mechanism to curb the wide price swings adds to the volatility.
Madhuprasad said, ?In absence of circuit filters, sometimes the the volume at a debuting counter turns out to be three to five times the capital offered which is disconcerting.?
Some experts attribute such high listing day volatility to the process of price discovery. ?The price movement on the day of listing is a result of price discovery. Since investors act on their perception of the right value, the price swings cannot be avoided,? said a market watcher.
Others believe that if the volatility is indeed due to malpractices by a section of investors, then it should definitely be punished. ?If the volatility is the result of manipulation in trading activity, it should definitely be addressed,? a merchant banker said.
Sebi chief has said the regulator was looking at the kind of penalty that could be imposed for irregularities relating to volatility on the day of listing. There has been talk that Sebi may introduce circuit breakers to limit the volatility in debuting stocks, for two trading days. Notably, one of the measures in Sebi’s proposed initiatives for 2011-12, has been an extension of the pre-call auction mechanism for IPO stocks. A pre-call auction is the process of determining opening price of a stock based on initial bidding prices.
