Market regulator Securities and Exchange Board of India (SEBI) has proposed a major overhaul of the price-discovery mechanism for initial public offerings (IPOs) and re-listed stocks traded during the pre-open call auction session, amid concerns that the existing framework is distorting market prices and suppressing genuine demand and supply dynamics.
In
a consultation paper, SEBI said the proposed changes are aimed at improving market efficiency, enhancing price discovery and reducing artificial price distortions during the one-hour pre-open session conducted between 9am and 10am on listing day.
The regulator noted that several market participants had raised concerns about the current 'dummy price band' framework and the methodology used to determine base prices for re-listed stocks.
According to SEBI, the existing system has frequently led to excessive buying pressure once normal trading begins, often triggering upper-circuit filters and additional surveillance measures.
At present, IPO stocks are allowed to trade within a dummy price range of -50% to +100% of the issue price during the pre-open session. Re-listed stocks operate within a band of minus 85% to plus 50%, while SME IPOs are permitted a wider band of minus 90% to plus 90%.
SEBI observed that these restrictions can hamper effective price discovery. The regulator cited an instance where nearly 90% of buy orders placed during the call auction session of a re-listed stock were rejected because they fell outside the permissible price bands.
Under the proposed framework, stock exchanges would automatically widen the price band by 10% whenever the indicative equilibrium price reaches the upper or lower threshold during the pre-open session. SEBI said this would eliminate the need for manual intervention and allow prices to adjust more naturally in line with market demand.
The regulator has also proposed extending the automatic band-expansion mechanism to SME IPOs to curb excessive volatility and improve price discovery in the segment.
Another significant proposal relates to re-listed or suspended stocks returning to trading after long gaps. SEBI has suggested that the base price for such stocks should be determined using the last traded price recorded within the previous six months.
For companies suspended for longer periods where recent market prices are unavailable, the regulator has proposed using the lower valuation determined by two independent valuation agencies as the reference price.
SEBI has further proposed that if a valid opening price is not discovered during the call auction session for a re-listed stock, the auction process should continue on subsequent trading days until a successful equilibrium price is established.
To strengthen the credibility of the auction process, the regulator has proposed a minimum participation threshold. Under the draft norms, a call auction session would be considered valid only if at least five unique PAN-based buyers and five unique PAN-based sellers participate.
SEBI clarified that equilibrium prices during the pre-open session are determined based on the maximum executable order volume. When equilibrium prices differ across exchanges, a unified equilibrium price is calculated using a volume-weighted average.
The proposed changes are expected to be closely tracked by market intermediaries, investment bankers and institutional investors, particularly as India’s primary market activity remains robust.
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