VMPL
New Delhi [India], October 21: NSE's 90% Price Control Cap Explained: National Stock Exchange of India has introduced a new rule to regulate the pricing of IPOs, effective 4 July 2024. The rule sets a cap on how much the share price can increase on the first day of trading compared to the IPO price. The maximum allowed increase is 90% over the IPO price. The price control limit will only apply to SME IPOs and not to mainboard IPOs.
For example, if an SME launches an IPO with a price band of Rs90-100 per share the highest possible price the shares can open at would be Rs190. This rule is designed to standardize and control price fluctuations on SME platform and prevent the company's stock from being excessively overpriced compared to its actual value.
Analysts believe this measure is aimed at curbing market froth which occurs when a stock's price starts to exceed its true worth by a significant margin.
Reasons Behind the Price Cap
Earlier this year, SEBI chairperson Madhabi Puri Buch expressed concerns about possible manipulation in SME segment noticing unusual activity in how some stocks were being traded.
We're noticing signs of manipulation in small and medium enterprises. We can see certain patterns but according to our regulations we need to carefully build a solid case which takes time, Buch said in March.
In 2024, a significant number of companies have been listed on SME platform across both major stock exchanges. Among these 35 companies saw dramatic price surges on their first day of trading with gains ranging from 99% to an astonishing 415%. These sharp price increases raised concerns about potential artificial inflation of stock prices, prompting the introduction of a new rule to limit such extreme jumps.
Impact on SME IPOs and Investors
The new price cap introduced by NSE can help reduce drastic price changes in the stock market on the first day of trading. With the cap limiting the opening price to a maximum of 90% above the IPO price, investors who buy shares with the intention of quickly reselling them for a high profit may find it harder to do so. This means the chance for quick, big profits is lessened.
Supporters of the rule believe it's a necessary step to keep the market stable and safer for small investors. By controlling how much new stocks can rise on their first day, NSE aims to protect these investors from the risks of big price fluctuations. This could also attract more long term investors making the overall market fairer.
On the other hand, critics are concerned that this cap might negatively impact SME IPOs. They argue that it could limit potential profits for investors and discourage small and medium sized companies from going public. If companies view the cap as a limit on their potential value, they might be less interested in listing their shares on the SME platform, which could slow growth in that market segment.
Future Outlook for SME IPOs and Market Growth
The new rule from NSE is designed to reduce volatility and speculation in the opening prices of SME stocks. Previously, some SME IPOs would see their prices jump on the first day often due to hype or limited share availability. With the new cap, the opening price can only go up by a maximum of 90% above the IPO price which helps keep these price swings in check.
This means investors looking to buy shares and quickly resell them at a high opening price might find it more difficult because the potential for quick profits is limited. Overall, the rule is intended to create a more consistent and stable process for determining the opening prices of SME IPOs.
Under this new regulation, while stocks can still list at a premium the highest possible premium is capped at 90% above their issue price. After the IPO the price may still change based on market conditions but the initial listing will have a tighter range to prevent excessive volatility.
This change follows a record year in 2023 when 176 companies raised a total of Rs4,842 crore through SME IPOs on BSE SME and NSE Emerge platforms drawing an impressive Rs2.8 lakh crore in applications much more than their initial fundraising goals.
NSE's move shows its commitment to keeping the market stable and protecting investors as the SME sector continues to grow.
Conclusion
NSE's new rule capping SME IPO prices at 90% represents a move to stabilize the market and protect investors. By limiting the initial price jumps the rule aims to reduce excessive speculation and manipulation which have been issues in the fast growing SME sector. Supporters view it as an important protection for small investors while critics fear it might discourage companies from going public and limit their potential profits. Overall, this regulatory change shows NSE's dedication to creating a more stable and fair market especially after a record year for NSE SME IPOs in 2023.
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