SEBI Proposes Amendments to IPO and Re-listing Price Discovery Mechanisms
SEBI Proposes Changes to IPO Price Discovery Mechanism
The Securities and Exchange Board of India (SEBI) has proposed changes to the price discovery mechanism used during the pre-open call auction session for Initial Public Offerings (IPOs) and relisted stocks. The proposal comes in response to concerns that the current framework may be distorting prices and suppressing genuine market discovery.
According to a consultation document published on Tuesday, SEBI noted that numerous market participants had expressed concerns about the current dummy price band system and the base price determinations for relisted stocks. This has led to artificial market distortions, resulting in heightened buying pressure at the start of regular trading, and additional monitoring actions.
The current system involves a one-hour pre-opening call auction session from 9 AM to 10 AM on the listing day, where only limit orders are allowed. Exchanges use various methods to calculate base prices for relisted stocks, whereas IPOs use the issue price as their base price.
Price Discovery Concerns
SEBI has expressed concerns that the current dummy price bands may hinder effective price discovery. The existing regulations allow IPO stocks to trade within a dummy price range of -50% to +100% of the base price during the pre-open session. In contrast, relisted stocks are allowed to trade within a range of minus 85% to plus 50%, while SME IPOs can function within a range of minus 90% to plus 90%.
| Stock Type | Lower Price Band | Upper Price Band |
|---|---|---|
| IPO | -50% | +100% |
| Relisted Stock | -85% | +50% |
| SME IPO | -90% | +90% |
The regulator noted an instance in which nearly 90% of buy orders during the call auction session for a relisted stock were rejected for being outside the allowed price bands. SEBI clarified that equilibrium prices during the session are determined by the maximum volume of executable orders. If equilibrium prices vary across exchanges, a unified equilibrium price is determined by volume-weighted averages.
SEBI has requested public input on whether modifications to the existing framework are needed to boost efficiency, improve price discovery, and minimize distortions, in light of changing market conditions and trading practices.
Investor Takeaway
SEBI proposes changes to IPO and re-listing price discovery mechanisms to address concerns of artificial market distortions.
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