The IPO process is a long journey for a company. It starts with getting approval from the market regulator SEBI by submitting the Draft Red Herring Prospectus (DRHP). After approval, the company goes through book building to assess investor interest and decide the final offer price.

The final step in a company’s IPO journey is the listing phase where the stock is made available for trading on a public exchange like NSE and BSE. In this article we will explain to you how the IPO listing process works and how the final listing price of an IPO is determined.

What is IPO Listing?

Listing is the final step in the IPO process, where the company’s stock becomes available for trading on exchanges like NSE and BSE. The market price of the stock is then determined by the interaction of demand and supply from investors and traders.

How is Price Discovery of IPO Happens on Listing Day?

This listing process follows a 1 hour timeline in Indian markets, where on the day of listing the IPO goes  through the price discovery mechanism that happens in the following manner-

Opening Ceremony and Pre-Open Session

9:00 AM: The IPO listing day commences with a ceremonial ringing of the bell, symbolizing the company’s entry into the stock market.

9:00 AM – 9:45 AM: The pre-open session allows market participants to place, modify, or cancel orders for IPO shares. No orders are executed during this period.

Price Discovery and Order Matching

9:45 AM – 9:55 AM: The exchange determines the equilibrium price for the IPO shares based on the demand and supply orders accumulated during the pre-open session. This price discovery process sets the stage for regular trading.

9:55 AM – 10:00 AM: The exchanges prepare the IPO shares for regular trading by finalizing order matching and trade confirmations. Orders are matched within the indicative price range, starting from the highest bid and lowest offer. This process continues until all orders within the range are matched.

Let us understand this with an example

Assume that a company called “XYZ Ltd” is going through the listing process. The company has set an indicative price range of Rs.100 to Rs.120 per share. During the pre-open session, investors place orders as follows:

BID PRICEBID QUANTITYASK PRICE ASK QUANTITY
12010,00010012,000
1155,0001058,000
11015,0001105,000

In this scenario, the demand for shares at Rs.110 per share exceeds the supply. Therefore, the price discovery process will start from this price point. Orders are matched until all orders at Rs.110 per share are fulfilled.

Next, the process moves to the next price level, which is Rs.115 per share. Again, orders are matched until all orders at this price are fulfilled.

The price discovery process continues in this manner until all orders within the indicative price range are matched. At this point, the weighted average price of all matched orders is calculated. This price becomes the listing price for XYZ Ltd’s shares.

In this example, let’s assume that the weighted average price is Rs.112 per share. This means that the demand and supply of XYZ Ltd’s shares were balanced at this price point.

Once the listing price is determined, regular trading of XYZ Ltd’s shares begins. Investors can then buy or sell shares at market prices, which may fluctuate based on supply and demand.

Regular Trading Session

10:00 AM Onwards: Regular trading commences for the IPO shares, allowing open market orders to be executed based on the established equilibrium price.

Steps to Buy/Sell IPO Shares

  • Place an order with the desired price for buying or selling IPO shares.
  • If the listing price is equal to or more favorable than your pre-open order price, the order will be executed at the listing price.
  • Unfilled orders from the pre-open session will be transferred to the regular trading session.
  • The deadline for order modifications and cancellations in the pre-open session is 9:45 AM.
  • There are no price bands during the pre-open session.
  • Regular trading hours for IPO shares follow the standard market schedule.

Key Points to Note

  • The pre-open session is crucial for price discovery and establishing a fair listing price for the IPO shares.
  • Only limit orders are accepted during the pre-open session. Market orders are not allowed.
  • Unexecuted orders from the pre-open session are carried over to the regular trading session.

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