SEBI’s 'When-Listed' Mechanism: What It Means For Pre-IPO Trading—Profit Explains

Earlier this week, the Indian markets regulator's chief said that it is considering bringing in a 'when-listed' mechanism, which will likely regulate India's market for IPO shares before they are listed.

"Trading of 'when-listed' securities is something we are actively looking at with both the exchanges," Madhabi Puri Buch said at an event on Jan. 21. "We feel that if anyway investors want to do [curb trading], why not give them that opportunity in a proper regulated way?"

Through this new proposed mechanism, the Securities and Exchange Board of India will look at regulating the frenzied trade that takes place in the three days between an IPO stock's allotment and its listing.

The pre-IPO market is different than the traditional 'grey market', even though both terms are associated with market operations taking place outside of formal oversight.

While the grey market has long been a parallel platform for trading shares, largely through cash transactions, a pre-IPO market deals with the buying and selling of stocks right before their official listing.

Three brokers who spoke to NDTV Profit on conditions of anonymity explained the dynamics of this market.

India's pre-IPO market is an exclusive club. Unless you come with an existing trader's reference, you can't get in, a broker told NDTV Profit.

Once a trader is in, they can buy and sell shares that are available with other traders through brokers specialising in such dealings. The broker can offer shares that are up for an IPO in lots of varying sizes, from as small as Rs 1,000 going up to Rs 10 lakh.

Before an IPO opens, shares are made available by individuals who have had pre-IPO allotment, such as those who have ESOPs to their name and are looking to profit off of them, a second broker told NDTV Profit.

Brokerages for the trades can vary anywhere between 1-2% of the investment, changing on a stock-to-stock and broker-to-broker basis. This is significantly higher than the typical 0.01% to 0.02% fees that brokers in the regulated stock market charge.

The trades are settled once every week, usually on Saturdays, but this duration can shorten as the IPO's opening date draws near. As the IPO opens, individuals subscribe to shares and simultaneously offer them to their broker, usually at a premium to the upper price band—the so-called grey market premium.

The hope is to offer their shares at a premium higher than what they expect the listing premium to be and thus pocket the difference, usually in cash, explained a third broker.

Once such a retail investor gets allotted the shares, they then transfer them to the broker at the predetermined premium.

In March 2024, Buch had told reporters about the heightened activity in the pre-IPO grey market being a matter of concern. But in her most recent comment, she gave no details on how the proposed mechanism will be formulated or by when.

A former SEBI official told NDTV Profit that the regulator's ambit will need to be increased in order for the proposed mechanism to take shape. Current regulations only apply to listed securities. We have to wait and see what the regulator is proposing for monitoring the unlisted market, this official explained.

Two of the three brokers NDTV Profit talked to said that they don't expect the mechanism to be immediately popular since traders will want to keep their profits off-record.

Big-ticket traders will still continue outside the purview of any regulated pre-IPO mechanism, as most of them want to retain the advantages of a cash-based system, the first broker elaborated.

The former SEBI official also said that Buch's comment comes at a time of heightened IPO activity, where grey market premiums have become an important factor that retail investors look out for.

The former official also highlighted increasing pump-and-dump IPOs in a capital market that continues to see an appetite for newly-listed stocks. In fact, the Association of Investment Bankers of India sees 1,000 stock debuts over the next two years.