Editor’s Note
The recent volatility in Meesho’s stock, triggered by a sudden exchange auction of over 10 million shares, serves as a stark reminder of the risks inherent in short-selling newly listed companies. This event underscores how a limited free float can amplify market moves, turning momentum against speculative traders.
The newly listed company Meesho has surprised some investors in the stock market, especially those who were betting on short selling, expecting the share price to fall. Over one crore shares suddenly went into an ‘exchange auction’. This means a large number of shares suddenly became available in the market, causing losses for short sellers. This incident clearly teaches us one thing: if a new IPO has limited shares available (called free-float), betting against the momentum or the share’s upward trend can be very risky.
In reality, only 6% of Meesho’s shares are available for trading. The remaining 94% of shares are in a lock-in period. The lock-in period means large investors cannot sell their shares for some time. Therefore, only a small portion is circulating in the market. Notably, in the auction, the share price was set at ₹258, while it was trading at ₹235 in the market. This means demand in the auction was so high that the share price went above the normal market price.
Meesho’s shares showed a rally of nearly 110% from its issue price of ₹111 in just seven trading days. This means shares bought at ₹111 more than doubled in just a few days. This rally was driven by strong investor interest and the limited number of shares in the market. With this surge, Meesho added over ₹50,000 crore to investor wealth after listing.
This rally trapped traders who had taken short positions. Short selling means they were expecting the share price to fall. But as the share price kept rising and shares remained scarce in the market, many investors could not deliver their shares on time. Because of this, the exchange sent these shares to the auction market.
This stock also caught the attention of experts. Global brokerage UBS initiated coverage on Meesho and gave it a Buy rating. UBS has set a target price of ₹220 and said that Meesho’s ‘asset-light and negative working capital model’ helps it generate consistent cash flow. This model makes it stronger compared to other internet-based companies.
This auction case repeats the situation seen last month in Groww. Last month, Groww’s IPO was also much discussed. Its shares rose nearly 89% from the issue price in just a few days. This means those who bought shares in the IPO made a good profit very quickly. As the shares rose so rapidly, some investors who expected the share price to fall (short sellers) got into trouble. Many could not deliver their shares on time, leading to about 30 lakh shares going to the auction market.
Experts pointed out Groww’s very low free-float (about 7%). This means only a very small number of shares were available for trading in the market. Short-selling with such low supply proved to be quite risky. Thus, Groww’s story is very similar to Meesho’s recent auction case. Both examples show that a bullish trend in new IPOs with low free-float can be a danger for short sellers.
