National Stock Exchange of India recently implemented a rule designed to regulate how much SME IPO prices can increase on the first trading day. Effective from 4 July 2024, this rule caps any first day price increase at 90% over the IPO price aiming to prevent excessive price jumps. This regulation however only applies to IPOs listed on SME platform and excludes mainboard IPOs.
For example, if an SME IPO has an issue price between ?90-100 per share under the new rule the maximum opening price on the first day would be ?190. The intent is to control sharp price fluctuations and keep the stock’s opening value closer to its true worth, protecting investors from overhyped valuations and curbing market speculation.
This new regulation comes after SEBI Chairperson Madhabi Puri Buch raised concerns earlier this year about unusual trading patterns in the SME sector, hinting at possible manipulation. In a statement made in March 2024, Buch acknowledged that although there are signs of stock manipulation in this segment, building a strong case under SEBI’s guidelines takes time.
In 2024, many companies listed on the SME platform across major stock exchanges, and 35 of them saw massive price jumps on their first day of trading, with increases between 99% and an incredible 415%. Such sharp surges raised worries that these stocks might be artificially inflated, leading to a new rule aimed at limiting these extreme first-day price spikes.
By capping first day price increases at 90%, NSE intends to make trading more predictable and reduce the potential for quick but risky profits. This cap is especially relevant for short term investors who often buy IPO shares with the intention of reselling them soon after listing to pocket gains. With the cap in place such quick profits become more challenging to achieve helping to reduce speculative trading and make the market more stable.
Supporters of the cap believe it’s an essential move to safeguard small investors who can be at risk of volatile price swings in new IPOs. The more controlled price range could also attract more long term investors to SME market, potentially making it a safer and fairer trading environment.
On the flip side, critics argue that this regulation could deter SME companies from going public. They point out that the cap might limit potential profits for both the company and its investors. As a result, some businesses might hesitate to list on SME platform, viewing the cap as a restriction on the possible value appreciation of their shares.
As SME sector expands, NSE’s decision to cap IPO price increases indicates a commitment to maintaining market stability and investor protection. While the cap may reduce the potential for massive first day gains, it could help attract a broader, more consistent investor base by creating a fairer trading landscape. This stable approach could encourage steady growth in SME segment as more investors feel confident about entering a market less prone to sudden, speculative price jumps.
At the same time, it remains to be seen how this rule might impact SME company’s willingness to go public. For companies hoping to achieve high initial valuations, the 90% cap may seem restrictive. However, if the rule succeeds in building a more trustworthy and less volatile market it could ultimately benefit companies in the long run by increasing investor confidence.
This regulation also follows a record year in 2023 where SME IPOs saw unprecedented interest. A total of 176 companies raised ?4,842 crore on BSE SME and NSE Emerge platforms with applications reaching ?2.8 lakh crore far more than the initial target. This strong performance highlights the growing interest in SME segment making it crucial for regulatory measures to protect both investors and companies from unstable or inflated pricing trends.
NSE’s 90% price cap on SME IPOs is a move to create a safer and more predictable market environment. By limiting first day price surges, NSE hopes to reduce risks associated with speculative trading and protect small investors from sudden price drops after an initial price hike. This regulatory step is especially relevant as SME sector sees rapid growth and increasing interest from a diverse set of investors.
While some might view this measure as restrictive especially for those aiming to make high short term gains, others see it as necessary to support sustainable growth in SME platform. This cap signals NSE’s dedication to ensuring a stable, fair and investor friendly market which could ultimately encourage a more diverse group of investors and benefit SME sector in the long run.
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