Synopsis: Zerodha CEO Nithin Kamath recently said in a social media post that several newly listed companies have seen their stock prices rise after debuting in the market and their technical factors for the rally.
Nikhil Kamath is an Indian entrepreneur and co-founder of Zerodha, India’s leading stock trading platform, along with his brother Nithin Kamath. They are renowned for revolutionising trading in India with low-cost, technology-driven solutions and have also invested in several startups and unicorns.
Online brokerage platform Zerodha’s Chief Executive Officer (CEO) Nithin Kamath, in a recent social media post, noted that many newly listed companies have seen their shares rise after debuting on the stock markets.
While he acknowledged that demand and supply dynamics primarily drive share price movements, Kamath also pointed out that several other factors are likely contributing to the post-IPO surge in the Indian stock market.
What technical factors are influencing this?
Traders Short IPO Stocks Intraday
Zerodha CEO Nithin Kamath explained that many traders try to short newly listed IPO stocks during intraday trading, expecting prices to decline. However, when these stocks unexpectedly surge and hit the upper circuit, short sellers are unable to buy back shares to square off their positions due to a lack of sellers.
How Traders Get Trapped at Upper Circuits
Once a stock hits the upper circuit, trading effectively freezes on the sell side. As a result, traders who have shorted the stock are stuck, since there are no available sellers from whom they can purchase shares to close their trades.
Auction Mechanism to Settle Short Deliveries
In cases of short delivery, stock exchanges conduct a special auction session the following day, typically between 2:30 p.m. and 3:00 p.m., to resolve the mismatch. During this session, the exchange seeks fresh sellers willing to provide the shares.
Auction Prices Can Be Much Higher
These auction settlements often take place at a significant premium to the prevailing market price. Kamath cited an example where Meesho’s auction price reached ₹258, even though the stock was trading at around ₹226 in the market at the same time.
What Is a Short Delivery?
This situation leads to what is known as a short delivery, when the exchange is unable to deliver shares to the buyer’s demat account because the seller failed to provide them. According to Zerodha data, short delivery occurs specifically when sellers cannot fulfill their delivery obligations.
Is this a way to exit stocks with higher gains?
Zerodha co-founder and CEO Nithin Kamath said that selling shares through the short delivery auction session can be an effective way to exit stock positions at potentially higher prices.
He explained that when a stock enters the auction window, investors who already hold the shares in their demat accounts can directly offer them for sale during the auction. Since auction prices are often higher than the prevailing market price, this method may allow investors to secure better returns.
Kamath added that participating in the auction not only helps investors exit their positions advantageously but also assists the exchange in settling short delivery trades.
Conclusion
As Nithin Kamath explains, many IPOs rise after listing not just due to strong demand but because of technical market factors. Intraday short selling, upper circuits that trap short sellers, and the short delivery auction mechanism create forced buying at higher prices. These dynamics push prices up post-listing and can even offer existing investors opportunities to exit at a premium, helping explain why IPO stocks often surge after debut.
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