Explained: Sebi’s ‘when-listed’ platform and how it could impact investors

What is the new platform?

The platform aims to reduce ‘grey market activity’ in companies’ stocks. Simply put, the grey market refers to the unofficial trading of securities even before being listed on stock exchanges. This is an unregulated market and works on demand and supply, with investors purchasing or selling shares notionally in the grey market even before they get listed.

The grey market is a cash market and there is no delivery of shares. Many retail investors also look at the premium offered in the grey market on shares of a company which has launched an IPO, before considering investing in the offer.

“We are actively considering “when-listed” trading. Today, we are at T+3 (trading plus three working days) from closure of the issue to listing, but even in those three days there is a lot of “kerb trading” (grey market trading). So, we feel that if anyway investors do that (kerb trading), why not give them an opportunity (to trade) in a proper regulated way?” the Sebi Chairperson said on Tuesday (January 21).

T is the day when an IPO closes for subscription while kerb trading refers to trading outside the ambit of stock exchanges post official market hours. “Those three days where there is (trading in) grey or black market, we don’t want that,” Buch said, adding that the regulator was working with stock exchanges to introduce the “when-listed” platform.

What is the current timeline for listing of shares?

At present, once the bidding process for an IPO closes, shares have to be listed on bourses in trading plus three (T+3) working days. The allotment of shares has to be done on T+1 day. In the period between the allotment of shares and listing day, investors trade in the grey market. It is this pre-listing grey market trading activity which the Sebi wants to reduce.

How does grey market trading in an IPO happen?

Since the probability of getting shares allotted in an IPO is thin, most investors who are keen to buy shares of a company enter the grey market. The day a company announces its plan to launch an IPO, grey market activity for such a company’s shares begins with a different set of brokers dealing only in the grey market. After arriving at a price band for an IPO, these operators then fix a premium over and above the price band.

For example, if the price band for an IPO in the grey market is Rs 90-100 per share, the premium could be Rs 10, Rs 20, or Rs 30 higher. Once the premium is fixed, investors send their bids to grey market operators for either buying or selling. For settlement of grey market trades, the opening price of shares of a company on the official listing day is considered.

If on the listing day, the stock opens higher than the grey market purchase price, grey market operators would be obliged to pay the difference between the opening price and the grey market purchase price to investors. In case of a lower opening than the purchase price, investors bear the loss.

How would the “when-listed” facility benefit investors?

The Sebi Chairperson said that as soon as the allotment of shares in an IPO is over, the entitlement to that share “gets crystalised”, which means that investors have the right to sell that entitlement. “The idea is that whatever the grey market (trading) is going on right now in the pre-listing period, we think that’s not suitable. If you got your allotment and you want to sell it, sell it in the organised market,” Buch said.

According to Jyoti Prakash Gadia, Managing Director of Resurgent India, a category 1 merchant banker, the grey market or informal trading by certain traders to make quick money is a potential source of volatility and skewed market sentiments that need to be curbed and controlled.

“Setting up of an official platform to allow formal trading even before the actual listing, duly monitored by the regulator, will formalise the market operations while doing away with the possible dubious transactions in the grey market,” he said.

Market participants, however, feel that Sebi should come out with a solution for checking grey market activity that starts from the day a company announces its IPO plan. A step to curb this would help in protecting the interest of retail investors.