Concerned over possible price manipulation in stocks on their first day of trade, market watchdog Sebi is considering greater surveillance and preventive measures such as a demand-driven price discovery.
An internal consultation process is already underway on this front after several complaints were received by Sebi recently regarding huge price fluctuations on the first-day trading, a senior official said.
The problem is more acute for stocks of the companies that list themselves pursuant to activities like de-mergers, relisting after revocation of earlier listing, suspension or capital restructuring, and not after initial public offers (IPOs), the official added.
The stocks that get listed on the bourses after an IPO have a reference point for commencement of trading in their public issue price, but there is virtually no such benchmark for pricing of scrips in non-IPO listings, thus leaving room for possible price manipulation.
At the same time, the watchdog is also looking to beef up its own ‘integrated market surveillance system’ as well as the surveillance systems of the stock exchanges for faster identification of any possible price-rigging cases.
Another senior official privy to the matter said, Sebi is currently investigating whether there was any price rigging in the case of Emami Infrastructure last week, as there was wild fluctuation in the share price movement with massive volume on its first-trading day. Adding to the suspicion, there was a massive difference between the prices of the scrip on the BSE and the NSE - in the early morning trade on July 28, when it got relisted pursuant to its demerger from the already-listed FMCG major Emami, the official added.
The stock opened at close to Rs. 600 a share on the NSE, but tanked to a low Rs. 86, a fall of over 85 per cent, in about an hour’s time. But on the BSE, the stock opened at Rs. 250 and sniffed at Rs. 300, before falling to a low of Rs. 86 - the same intra-day low on the NSE.
While there is a mechanism that prevents any rise or fall of over 20 per cent in a single day in most of the stocks, the exceptions being mostly large-cap stocks and those where derivatives trade also happen, such price circuits are not imposed on the first-day of trade. It’s only after monitoring the movement of the stocks, the authorities determine whether to impose a circuit of 5 per cent, 10 per cent or 20 per cent.
Besides, in cases of initial public offers, there is a reference point in the public issue price when the trading commences, but the same is not the case for non-IPO listings.
In such cases, the possibility of price rigging increases as manipulators can first buy shares in huge volumes to create demand, push the prices to astronomically high levels and then sell later, the official said.
However, Sebi is not in favour of imposing any price band for first-day trade as such, as it had already experimented with such measures in the past and had found that such steps came in the way of a fair price discovery based on demand and supply, the official said.
Sebi is more seriously considering checking any price rigging through measures like ‘call auction’, which was recently proposed by the regulator for blue-chip Sensex and Nifty stocks and where price gets discovered in the first few minutes of trade after matching all the buy and sell orders.
While Sebi could look at expanding the scope of call auction to non-Sensex or non-Nifty stocks later, it is actively considering this method of price discovery for the first-day trading of stocks that get listed after cases like demergers, revocation of listing suspension or capital restructuring, the official said.
In March 2008, Sebi had abolished a practice of imposing price bands on the first-day trade in case of mergers, demergers, amalgamations, capital reduction, rehabilitation packages approved by the Board of Industrial and Financial Reconstruction under the Sick Industrial Companies Act and under the RBI-approved corporate debt restructuring.
The decision was taken after concerns were raised about the impact on price band on price discovery in such cases.
In the Emami Infra case, the Sebi is already studying the data in its integrated market surveillance system and is also considering potential upgradation of this system as also that of the bourses.
The Sebi is already witnessing a spurt in the cases of market manipulation and price rigging, which account for about 75 per cent of the total cases taken up by it for investigation in 2008-09, as against about 50 per cent in the previous year.