Sunday, May 20, 2012

The Current State of Issue of Shares: Will it make or Break

Since last one year there were very few IPO in Indian Market, but there were many changes which has taken place in terms of Rules, Regulation and Guidelines by SEBI / FMO on public issues. We will discuss these laws and how it will impact investors, its sentiments and how it may impact price discovery process?

The Major changes in the guidelines are

Increase in application size of retail investors from Rs 1,00,000/- to Rs 2,00,000/- (already discussed in my previous blog) : As discussed in my previous blog it will reduce the returns on IPO market and may shy away investors. These has already taken place in market where there are no new issues and investors also do not have appetite and when good issue came in market the returns on investment in IPO was dismal (MCX). 

Finance minister has said that it will reduce the application time and it intend to do it by bringing in  IPO through stock exchanges: Finance Minister has gone on record to say that IPO process will be streamlined which will reduce application and allotment time and also it will streamline whole IPO process. They intend to do it by selling shares on Stock Exchange. In this process the investor will be expected to apply for shares on stock Exchange terminal using brokers, the allotment would be done as trade confirmation and shares will be credited in investor account using clearing house mechanism. So maybe by evening you will know your allotment and listing may happen in few days. Seems simple what will change?
a)       The issuer will save money on commission as they won’t be obliged to pay to brokers soliciting clients (There are many people who make a living on IPO forms, they will be heavily impacted and maybe the marketing of issue will be impacted)
b)      You will have to pay brokerage for applying through brokers.
c)       Now if you apply in shares you can apply it through ASBA (Wherein you can earn interest on that money till the date of allotment), but if you apply through broker you will have to give money to him in full and then only he will be eligible to apply on your behalf (It may happen that clients would be expected to pay before few days to avoid last minute rush) and will also put question on risk management of broker.
These may not impact much to investors apart from brokerage but these will be that way you apply in future.

New category of “Offer for sale” introduced by SEBI using Stock Exchange Platform: To bring IPO process under the ambit of stock exchange SEBI has created a new category of IPO “Offer for Sale” . In this category the promoters or Major stake holders can sell shares directly to investors.
The mode of application for these shares is same as discussed i.e. by putting bids through brokers, these offer is open only for one day and on listed top 100 stocks. So you know the allotment by 3.30 pm
What’s the difference in this category?
a)       We pay brokerage to apply for these shares, but we also may get allotment at discounted prices.
b)      The sellers would be promoters who want to reduce their holdings to meet SEBI guideline of Maximum 75% promoter holding by June 2013.
c)       The best part of this segment is the seller pays STT and can save capital gains tax.
d)      You can trade on those shares in 2 trading days.
There are successful, unsuccessful and controversial issue in this segment which includes ONGC flip flop.

New category of “Institutional Placement Programme” introduced by SEBI using Stock Exchange Platform : There is also a category like above but wherein only the Institutional Investors can apply. Other rules and guidelines are same as offer for sale but I have my reservation of this category. These can be misused by promoters to place their holdings with these Institutional investors maybe with some arrangement, which may be detrimental to interest of minority investors. I am sure SEBI can plug the holes in it.

SEBI law says any IPO with issue size of up to 25 crores would have pre opening session for price discovery and will be traded in T2T segment of 10 trading days post listing: SEBI say that all IPO below Rs 250 crores would be traded in T2T segment (Compulsory delivery, No Squaring off allowed) for first 10 trading days, Also on day of listing the stock will be in pre opening session for 1 hour for price discovery process.
Such steps were taken by SEBI to reduce huge volatility on the day of listing, but in turn it has taken the essence of trading from these stocks, Lets discuss what is happening?
a)       As there is no square off, traders keep away from these stocks.
b)      Because of that it reduces liquidity on the counter, it increase the cost of entry and exit.
c)       People apply in IPO is earn price appreciation on allotment but if traders move away, it reduces the probability of higher price (As there will be many investors who want to sell at the open and buyer may shy away knowing that or it may reduced its bid price)
d)      Because of these I believe listing gains would get capped and in short run its flavor.

SEBI law says any relisting and scheme of arrangement (Except for stocks in F&O segment) would have pre opening session for price discovery and will be traded in T2T segment of 10 trading days post listing: These stock will also trade in T2T segment which will hamper price discovery process in short run.
The above rules changes the way we trade in newly listed stocks and It will definitely impact the price discovery of these stocks on lower side,

But needless to say, that price discovery process and its impact on stock price will be there in short run but longer term performance of these stocks will only depends on its fundamentals.

I welcome your suggestion and comments.

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