This initiative aims to regulate and formalize the currently informal ‘curb trading’
The Securities and Exchange Board of India (SEBI) is actively considering the introduction of ‘when-listed’ trading for securities, a move that could significantly transform the landscape of pre-listing Initial Public Offering (IPO) activities in the country. This initiative aims to regulate and formalize the currently informal ‘curb trading’ that occurs between the closure of an IPO and its official listing on stock exchanges.
Understanding ‘When-Listed’ Trading
‘When-listed’ trading refers to the practice of allowing securities to be traded after the completion of an IPO but before their official listing on stock exchanges. This mechanism provides a formal platform for price discovery and liquidity during the interim period, which traditionally spans a few days. In India, this period has been a fertile ground for ‘curb trading,’ an informal and unregulated market where shares are exchanged based on anticipated listing prices. By introducing ‘when-listed’ trading, SEBI aims to bring these transactions under regulatory oversight, ensuring transparency and protecting investor interests.
SEBI’s Recent Initiatives
In August 2023, SEBI reduced the IPO listing timeline from T+6 days to T+3 days, effective on a voluntary basis from September 1, 2023, and mandatory from December 1, 2023. This reduction aimed to expedite the process between the closure of an IPO and its listing, thereby reducing the window for unregulated trading activities.
Despite this acceleration, the existence of curb trading indicates a persistent demand for pre-listing transactions. SEBI’s contemplation of ‘when-listed’ trading is a proactive measure to address this demand within a regulated framework. SEBI Chairperson Madhabi Puri Buch highlighted the need to legitimize these trades, stating that such a system would provide a structured environment for transactions that are already occurring informally.
Implications for the Market
1. Enhanced Transparency and Investor Protection: Formalizing pre-listing trading through ‘when-listed’ securities would subject these transactions to regulatory scrutiny, thereby enhancing transparency. Investors would benefit from a structured platform that mitigates the risks associated with informal trading channels.
2. Improved Price Discovery: A regulated pre-listing trading window allows for better price discovery, as it enables market participants to gauge demand and supply dynamics before the official listing. This can lead to more accurate pricing of securities upon their debut on stock exchanges.
3. Liquidity Provision: Investors seeking to exit or enter positions during the interim period between IPO closure and listing would have a legitimate avenue to do so, thereby improving liquidity in the market.
Challenges and Considerations
While the introduction of ‘when-listed’ trading presents several benefits, it also poses certain challenges:
- Regulatory Oversight: Implementing a new trading mechanism requires robust regulatory frameworks to monitor and manage potential risks, including market manipulation and insider trading.
- Infrastructure Readiness: Stock exchanges and market participants would need to upgrade their systems to accommodate ‘when-listed’ trading, ensuring seamless operations and compliance with regulatory standards.
- Investor Awareness: Educating investors about the nuances of ‘when-listed’ trading is crucial to prevent misunderstandings and ensure informed participation in this new market segment.
Contextual Market Developments
The consideration of ‘when-listed’ trading comes at a time when India’s IPO market is experiencing significant growth. In 2024, 91 large firms went public, raising a record 1.6 trillion rupees ($18.5 billion). This momentum is expected to continue, with over 90 companies having filed draft prospectuses to raise an estimated 1 trillion rupees in 2025.
Additionally, SEBI has been proactive in tightening regulations for IPOs, especially concerning small and medium enterprises (SMEs). New rules mandate that SMEs must have an operating profit of at least 10 million rupees from operations in two of the past three years to be eligible for an IPO. Furthermore, the offer for sale by existing shareholders is limited to 20% of the total issue size, and the use of IPO funds for repaying loans to major shareholders is restricted.
Global Perspectives
The concept of ‘when-issued’ or ‘conditional’ trading is not new in global markets. For instance, in the United States, ‘when-issued’ trading allows transactions in securities that have been authorized but not yet issued, providing a mechanism for price discovery and hedging. Similarly, the United Kingdom employs ‘conditional dealing’ to facilitate trading of shares between the announcement of an offering and its settlement. These international precedents offer valuable insights into the potential implementation and regulation of ‘when-listed’ trading in India.
SEBI’s contemplation of ‘when-listed’ trading represents a significant step towards modernizing India’s capital markets. By formalizing pre-listing IPO trading, the regulator aims to enhance transparency, improve price discovery, and provide liquidity within a structured framework. While challenges exist, the proactive approach of SEBI, coupled with lessons from international markets, positions India to effectively integrate ‘when-listed’ trading into its financial ecosystem. As the IPO landscape continues to evolve, such regulatory innovations are essential to maintaining market integrity and fostering investor confidence.
