Nithin Kamath Warns: Miss This IPO Glitch And You Are Handing Profits To Someone Else

A surge in post-IPO stock prices may be less about retail hype and more about hidden settlement mechanics, according to Zerodha co-founder and CEO Nithin Kamath, who says these structural quirks are trapping short sellers and distorting early trading action.

In a post on Linkedin, Kamath said he has observed a pattern: newly listed stocks often continue to rally for two to three sessions after listing, even when valuations seem stretched. While this is usually chalked up to strong demand and limited free float, Kamath pointed to an overlooked technical driver: short delivery auctions.

The problem starts with short selling. Many traders try to short IPO stocks intraday, expecting prices to fall after a strong listing. But when stocks hit upper circuits and no sellers are available, short sellers can't square off their positions. This results in “short delivery,” where shares aren't delivered to the exchange by the settlement deadline.

To resolve this, exchanges conduct a special auction the next trading day, typically between 2:30 pm and 3:00 pm. These auctions are restricted, only shareholders with existing demat holdings can participate, no fresh buying is allowed, and the exchange acts as the buyer. The auction price can go up to 20% higher than the previous close.

The result? Short sellers are forced to buy back shares at inflated auction prices, taking significant losses. “Prices discovered in these auctions are often well above market,” Kamath noted, citing Meesho's IPO as an example. Its auction shares were cleared at around Rs 258, while the regular market price hovered near Rs 226.

Kamath said the mechanism not only amplifies post-IPO price spikes but also opens an opportunity for long-term investors. Those already holding IPO shares in their demat accounts can offer them in auctions and potentially exit at higher prices than available on the open market, all while helping the exchange settle failed trades.

Zerodha has now enabled this feature directly on its platform, allowing eligible investors to participate. “It's a rare situation where retail investors can benefit from inefficiencies,” Kamath added.