Electrosteel Steels Insolvency Fallout: Exchanges Grapple With Price Distortion

Insolvency resolution of Electrosteel Steels throws up a concern for exchanges.

Monitors indicating stock prices are reflected in a glass panel at a brokerage firm in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
Monitors indicating stock prices are reflected in a glass panel at a brokerage firm in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Insolvency resolution of Electrosteel Steels Ltd. has thrown up an unexpected concern for exchanges: a wide gap between the prices of the stock on two bourses.

Shares of the steelmaker, taken over by Vedanta Ltd., closed at Rs 10 apiece on the National Stock Exchange of India Ltd. on Wednesday compared with Rs 48.25 on the BSE Ltd.

To curb such large variations, the bourses have jointly written to the regulator to “harmonise” prices across platforms, BSE said in an emailed response to BloombergQuint without giving details. “We shall be driven by the decision taken by the Securities and Exchange Board of India on the matter.”

An emailed query to the NSE remained unanswered.

Electrosteel Steels was the first company to resume trading after a week following the implementation of resolution plan. At least 60 listed entities are at various stages under the Insolvency and Bankruptcy Code. Monnet Ispat and Energy Ltd., taken over by JSW Steel Ltd., will resume trading after reissuing shares starting next week.

An artificial price gap in the prices on two exchanges is by no means acceptable, Arun Kejriwal, director at Kris Capital, said, adding that an arbitrage opportunity needs to be justifiable. “Such a difference can lead to disputes and leave undue room for manipulation which neither exchange wants. They need to come to a common ground on the price else the investors will have no option but to approach the regulator.”

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To be sure, different prices on the two exchanges is nothing new. But the gap is usually not more than 1 percent. Larger variations are rare, and usually caused by some corporate actions, delisting and listing. 5Paisa Capital Ltd. was one such exception, listing at Rs 400 apiece on the NSE and at Rs 650 apiece on the BSE.

BSE, in its response to BloombergQuint, said such a difference is based on the price discovery on the first day of trading and the base price on which circuit filters are applied.

To avoid that, the exchanges need to talk to each other so that there is correct price discovery when restructuring or relisting happens, said Rajesh Baheti, president of the Association of National Exchange Members of India—a lobby of stockbrokers. “This is not isolated and seems to be a clear case of miscommunication between the exchanges.”

One possible solution suggested by the exchanges to the regulator is to consider the price of the platform with larger trading volumes as the uniform discovered price, according to a person with direct knowledge of the development, who didn’t wish to be identified.

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What Happened At Electrosteel Steels?

On June 11, the stock stopped trading ahead of Vedanta’s resolution scheme being implemented. The exchanges announced a special pre-open session for its relisting on June 18, fixing Rs 10 as the base value. During the pre-open trading, the stock settled at 94 paise on the BSE and at Rs 1.1 on the NSE. It opened higher at Rs 13.2 and Rs 1.4, respectively, on the two exchanges.

  • The stock continued to rise on the BSE, hitting a high of Rs 74.4 on Aug. 8, according to the data on the exchange. On the NSE, it was trading at Rs 5.5 then.
  • The shares closed at Rs 48.25 apiece on the BSE on Aug. 29 and Rs 10 on the NSE.

There is also a wide gap in the trading volumes on the two platforms. Just 2,273 shares changed hands on the NSE on Aug. 29 compared with 72,472 shares on the BSE.

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Typically, according to the regulator’s 2012 circular, such stocks are kept in a trade-to-trade segment for the first 10 days with applicable price bands to prevent high volatility.

In case the equilibrium price—reflecting a demand-supply balance—is discovered in the call auction or pre-open trading, the price band for trading is 5 percent of the discovered price. If the equilibrium price is not discovered, the scrip continues to trade in call auctions till the price is determined.

There is a larger issue which leads to price discrepancies, said a former SEBI official requesting anonymity, attributing it to lack of adequate volume and price discovery in pre-open sessions. Globally, they work smoothly but in India there is no contribution towards price discovery and investors only participate when the trading is regular, said an academician, he did not wish to be quoted as he consults with the regulators on policy issues.

Monnet Ispat will be the next test case, unless exchanges find a way to harmonise prices.

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