Friday, September 17, 2010

Listing of Share in Trade to Trade Segment

There is a always a huge volatility on the first day of listing of stocks. Most of the times it has happened that trades have taken place at very high or low price before the price settles. This is true for shares listed because of mergers, De-mergers, suspension or any other corporate action in the company.

Stocks listed after Corporate actions are volatile and trade takes place at outlier price because

a) There is no price band on first day of listing.
b) Most of the Investors are not aware about the true valuations of the company.
c) Speculative elements enter to trade in such stocks as they will have action because of volatility.
d) You can square off you position booking profit or losses.
e) The companies are also not transparent about the valuation of the company

To curb excessive volatility of stock on day of listing SEBI came out with the proposal to list stocks in T2T segment of the exchange, the salient features of the circulars are

a) All stock listed / Re listed after corporate actions would be traded on T2T segment of the exchange.
b) All such stocks would be traded in T2T segment for 2 weeks (10 trading day), then they can be moved back to EQ segment.
c) There will be no circuit limit on first day of listing.
d) The scenarios in which shares would be traded in T2T segment are Merger, De merger, Capital reduction, capital consolidation, Scheme of arrangement, CDR packages etc. Also if the Shares are allowed to traded in permitted to trade category and if the shares are Re-listed after 1 year.
e) Such rule wont be applicable on stocks which are traded in derivative segment, of are part of Index which is traded on Exchange (Nifty, Bank Nifty, IT index and Bank Nifty)
f) There was a write up "that settlement of the trades will not be done by exchange", it was a mis - understanding, The truth is trades will be cleared by exchange but under he rules of T2T segment.

The biggest advantage of such move is that only serious players will come to trade in the stock, which will reduce volatility in stock and gradually lead to price discovery. The price manipulation cannot be done on first day as the speculator will have to give delivery and take delivery and it is perceived that investor will get right price.

But We have to look at this circular critically also , there are disadvantages and there are better ways to handle such situations.

a) We have seen that price of stock falls if it is shifted to T2T segment, because of such reason price discovery process will be flawed as most players will be ready to trade at discounted rate because of market micro structure.
b) There can be serious price manipulation as traders will not participate and the manipulator can rig or suppress the price as per his interests , thereby sending wrong signals to investors.
c) There is no clarity whether original stock would also be traded on T2T segment on EX date ?
d) I perceive that price discovery will be flawed as investor/ speculator would sell the stocks or wouldn't buy the stocks before the EX date as they may get struck with position in T2T segment, even institution wont prefer such positions.
e) There are better ways to deal with such situation, Companies gives details of Swap ratios and salient features. but most investors are not aware about the valuations. They are not aware about the true position of companies, their assets and liabilities. they may not even have balance sheets or they are vague. The Investors are not aware about assets and liabilities the companies have in case of Mergers, De-mergers, scheme of arrangements or re listing.

The companies are not mandated by listing guidelines of the exchange to give such in depth details, most of the time you would get is salient features and swap ratio.

SEBI can make it mandatory under listing guidelines about the valuations of the companies, its balance sheet at the time of listing and any other material information which can impact the price of the stock.

I am sure , if Investors have such data they are competent to price the stock and trade, and price discovery will be smooth.

f) SEBI can make mandatory listing of all stock in specified time in case of merger/ De-merger or scheme of arrangements to avoid change in position and developments of companies which can change valuations.
g) It is also found that no data is available to investors in case of Re-listing and permitted to trade, There is no data on balance sheet and other facts of the company (Sometimes we only know the name). SEBI can make it mandatory for Exchange to collect latest balance sheet, and other data including latest share holding before they are listed or allowed to trade.

I am sure such measure would be a better precursor to price discovery process rather than shifting the stock in T2T segment.

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