SEBI plans to allow pre-listing trading in shares to reduce grey market trading

At present, when the IPO closes for subscription and opens for trading, there is a gap of at least three trading days. In these three days, there are a lot of grey market trading activities that happen. Now Securities and Exchange Board of India (SEBI) wants to do something about it. Let us look at the details.

What is grey market premium?

For a better understanding, before we get to the proposal details, we should know the grey market premium. Grey Market Premium (GMP) refers to the price at which shares of an upcoming Initial Public Offering (IPO) are traded unofficially in the grey market before their official listing on the stock exchanges like NSE and BSE. The grey market is an informal, over-the-counter market where shares are traded based on demand and supply dynamics without regulatory oversight by authorities like SEBI.

How GMP works?

When a company announces an IPO, shares are allocated to investors, but these shares are not tradable until the listing day. During this interim period, investors and traders speculate on the potential listing price, leading to trades in the grey market. GMP is the difference between the expected listing price and the IPO issue price.

Let us understand with an example. If the IPO issue price is Rs 100, and the GMP is Rs 50, the expected listing price would be around Rs 150.

SEBI's New Proposal

SEBI plans to introduce a regulated platform ("when listed") for pre-listing trading of IPO shares. This new mechanism will allow investors to trade shares in a regulated manner during the three days between IPO allotment and listing. This initiative will replace the existing unregulated grey market, as discussed above, which currently operates during this period. The grey market lacks transparency and exposes investors to significant risks.

Below are some of the benefits of the new portal:

• Greater Transparency: The portal will provide a clear view of market demand and potential valuations for upcoming IPOs, reducing reliance on speculative figures often associated with the grey market. Investors will have access to legitimate data, minimizing confusion and enabling a fairer assessment of IPO performance.
• Improved Liquidity: By enabling pre-listing trading, the platform will allow investors to exit their positions or make adjustments before the shares are officially listed. It will reduce uncertainties for investors who may want to capitalize on market demand during the interim period, improving cash flow opportunities.
• Enhanced Investor Security: The portal will mitigate risks associated with the unregulated grey market, where transactions often lack legal protection and transparency. It will offer a structured environment under regulatory oversight, ensuring compliance with SEBI guidelines and safeguarding investors’ interests.
• Boost to Investor Confidence: A transparent and regulated system will instill confidence among investors, particularly retail and first-time investors, who often feel wary of participating in IPOs. Institutional investors, both domestic and international, may also find the improved structure attractive, potentially increasing participation.

Before you go

The proposal to permit pre-listing trading in shares aims to curb the prevalence of the grey market, an unofficial and unregulated market where shares of companies about to go public are traded. By establishing a formal pre-listing trading mechanism, SEBI intends to bring transparency and regulatory oversight to this activity. Overall, it is a good move by SEBI, but we will have to wait for it to get implemented.