How Will NSE's 90% Price Cap On SME IPO Affect Investors?

The National Stock Exchange of India (NSE) has introduced a new regulation to standardize price discovery for SME IPOs during the pre-opening session. Starting from July 4, 2024, this rule aims to bring consistency across exchanges and reduce excessive volatility in opening prices.

The new rule sets a price cap of 90% above the issue price for all SME IPOs. This means that the opening price cannot increase by more than 90% compared to the IPO offer price.

This price control cap is specifically tailored for the SME segment. It will not affect Mainboard IPOs, relisted securities, or public debt. The regulation aims to bring stability and predictability to the pricing of SME IPOs without impacting the broader market segments. By limiting excessive price surges, the cap helps ensure a more orderly market, benefiting both investors and issuers in the SME space.

Understanding the Motive and Need

SME IPOs typically have low volumes, making it relatively easy to inflate share prices and leading to significant overvaluations. The markets regulator SEBI also issued warnings about price manipulation in SME IPOs, prompting stronger regulation.

The introduction of a listing price cap is expected to reduce the pre-IPO rush in the unlisted market, thereby controlling valuations after listing.

This move to regulate listing surges follows ten highly successful listings in the past two months, raising concerns about valuations and potential price manipulation.

By Implementing a 90% cap, the NSE aims to:

• Promote Market Integrity: Creating a stable and predictable trading environment upholds the integrity of the market system and builds trust among long-term investors.
• Safeguard Retail Investors: With SME IPOs carrying higher risks, the cap safeguards retail investors, who are more susceptible to sudden price swings.
• Ensure Fair Valuation: The measure aims to maintain fair and realistic pricing for newly listed SME stocks, preventing the formation of artificial price bubbles.

Regulators may consider additional measures to further enhance oversight shortly.

Impact Of This Price Cap

• Market Stability

The NSE's decision to cap the opening price at 90% above the issue price aims to mitigate the excessive volatility seen in SME IPOs. This step is anticipated to enhance market stability by averting drastic price swings that could undermine investor confidence.

• Reduced Potential Gains

A downside of this measure is its limitation on potential gains for early investors seeking significant price increases during the IPO. This cap may dissuade some from participating in SME IPOs.

• Investor Protection

The price cap safeguards retail investors from the inherent risks of highly volatile IPOs. By curbing price surges, the NSE aims to shield investors from undue market risks, fostering a more secure investment climate.

• Issuer Concerns

The price cap could also be seen by companies planning to list on the SME platform as a restriction on their valuation prospects. This perception might discourage SMEs from pursuing public listings, affecting the growth and vibrancy of the SME market segment.

Experts' Opinion on IPO Debut

Many experts mentioned that the listing price cap on SME IPOs could influence grey market premiums for upcoming public offerings. While the cap might limit initial price surges, it doesn’t eliminate the potential for strong market debuts.

For instance, an IPO that lists at a 90% premium and then rises by an additional 6-10% could still double investors' money. Despite this possibility, such high-performing listings are expected to become less common. The new regulation aims to bring stability, which could reduce the frequency of dramatic price increases on listing day.

Analysts Urge Long-Term View

Overall, while the cap might moderate extreme price movements, it doesn't entirely rule out significant gains. Investors will need to adjust their expectations and strategies, accordingly, focusing more on the long-term potential of their investments rather than short-term gains.

Sunil Shah's Take on NSE's Recent Move

Sunil Shah, Group CEO and Director at Khambatta Securities views the move positively as it will help curb excessive speculation. He said, "Some recent SME issues have seen very high listing gains which surely poses the question of speculative activity around those stocks. This cap imposed by the NSE will help reduce speculative activity and volatility in SME listings."

Conclusive View

However, analysts believe that the number of companies entering the SME segment and the valuations at which IPOs are priced are unlikely to change significantly. They also think that with the price cap in place, the speculation aspect of SME IPOs, which has become a significant part of the market, will come under control. Overall, analysts view this move as a welcome one and not the end.

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