NSE's 90% Cap on SME IPO Listing Prices

National Stock Exchange of India (NSE) has introduced a new rule to make the pricing of IPOs on the SME platform more consistent. This change aims to standardize how IPO prices are set. The article will explain what this new rule is, what it means for investors and companies and why NSE decided to implement it.

90% cap on SME IPOs: What does it mean?

National Stock Exchange of India (NSE) has introduced a new rule for small and midsize enterprises (SMEs) listing their shares. From now on, there will be a limit on how much higher the share price can go on the first day of trading compared to the price set during the IPO. This limit is set at a maximum of 90% over the IPO price. This rule aims to make the process of setting the initial share price fairer and more consistent across different stock exchanges. Importantly, this rule only applies to SME IPOs and not to larger companies listing on the mainboard. The new rule came into effect immediately on July 4, 2024.

let's take the case of a small and medium sized enterprise (SME) IPO that was introduced with a price range of ₹90-100 per share. In this scenario, when trading begins, the shares are expected to open at a maximum of ₹190 each. This would represent a premium of 90% above the upper limit of the IPO price band, which is ₹100 per share.

Analysts suggest that the circular from NSE aims to curb excessive speculation in the market. Froth happens when a company's share price shoots up way higher than what it's actually worth.

Recently, three companies listed on the SME segment of NSE had incredibly successful debuts. Diensten Tech started trading on July 3 at ₹240 per share, marking a 140% premium. Divine Power Energy debuted on July 2 at ₹155 per share showing a premium of 287%. Shivalic Power Control started trading on July 1 at ₹311 per share, with a premium of 211%.

Reactions to the Decision

Supporters think it's needed to control how much new stocks can surge on their first day. This should make things more stable and safer for small investors attracting more long term investors and making the market fairer.

It helps protect smaller investors from the risks of big price swings in IPOs. By limiting how much prices can shoot up, NSE ensures investors aren't exposed to too much risk making it safer to invest.

Critics worry it might hurt how SME IPOs work. They say it could limit how much money investors can make and make SMEs less likely to go public which could slow down growth in that part of the market.

Companies wanting to list on the SME platform might see the cap as a limit on how much they can be valued. This could make them less likely to go public which could slow down growth in the SME market.

Reasons Behind Implementing This Measure

stock exchange is putting a rule in place to limit how much a price can change right after SME companies start trading each day. This helps to make sure the market works smoothly and predictably.

This rule also helps to protect regular people who invest in these companies. Small investors can be hurt the most if prices change too much too quickly.

By putting this rule in place, the exchange wants to make sure that the prices of these new stocks are realistic and not just jumping around wildly. This helps prevent prices from going way up or down too fast, which could be misleading.

Overall, the goal is to make the market safer for everyone involved especially those who might be more at risk when things get unstable.