SEBI's Bold Move to Tame IPO Grey Market

In a significant move to curb grey market activities and enhance the transparency of the IPO process, the Securities and Exchange Board of India (SEBI) is developing a regulated trading mechanism to allow investors to sell shares immediately after allotment in an initial public offering (IPO). SEBI chairperson Madhabi Puri Buch announced the initiative during the Association of Investment Bankers of India (AIBI) Annual Convention 2024-25.

The proposed system, termed the ‘when listed’ facility, is currently under discussion with two major stock exchanges. This mechanism will enable trading of allotted shares during the three-day period between the closure of an IPO and its official listing on the stock exchanges. Buch emphasized that this move aims to replace the current unregulated grey market activities, providing a formal platform for pre-listing trading.

“Today, we operate on a T+3 timeline from the closure of an issue to its listing. Even within those three days, there is significant curb trading,” Buch highlighted. She further elaborated that allowing investors to trade allotted shares in a regulated environment would address the concerns associated with grey market transactions. The entitlement to shares is crystallized upon allotment, and thus, the allottee should have the right to trade these entitlements immediately, she explained.

The SEBI chairperson's announcement comes in the wake of a record-breaking year for IPOs. In 2024, 91 companies raised a total of Rs 1.6 trillion through IPOs, according to data from Prime Database. The high subscription rates and substantial listing gains from many of these IPOs have fueled grey market activities, prompting SEBI's intervention.

However, Buch also voiced concerns over the misuse of funds raised via IPOs. She described the misuse as ‘grievous’ and stressed that SEBI is working on strengthening corporate governance regulations over the next two to three years. The aim is to hold companies and their investment bankers more accountable for the use of IPO proceeds.

“Investment bankers are well aware when they bring a pump-and-dump company to the capital market,” Buch remarked, indicating that greater responsibility lies with these intermediaries. SEBI’s efforts to improve governance include working closely with top proxy advisory firms to launch a new portal that will serve as a repository for related party transactions (RPT). This portal will democratize information on RPTs, providing stakeholders with a valuable resource to assess the governance standards of listed companies.

Buch highlighted the critical role of proxy advisory firms in maintaining market integrity, attributing their effectiveness to a subscriber-pay model rather than one funded by issuers. This model ensures unbiased advice and fosters greater accountability in the corporate sector.

Conclusion

SEBI’s proactive steps towards regulating pre-listing trading and enhancing corporate governance are expected to bring more transparency and trust to the IPO process. By formalizing the ‘when listed’ trading mechanism and tightening oversight on fund usage, SEBI aims to curb grey market activities and promote a healthier, more accountable capital market environment.