SEBI Seeks to Revamp IPO, Relisting Regulations for Enhanced Price Discovery

India's Capital Markets Regulator Seeks Overhaul of IPO Price-Discovery Process

The Securities and Exchange Board of India (Sebi) is considering significant changes to the price-discovery process for initial public offerings (IPOs) and relisted stocks during the pre-open call auction session. According to a report by Business Standard, the proposed measures aim to address concerns around inefficiencies in the existing framework, particularly in cases where a large number of investor orders are rejected due to restrictive price bands.

For relisted companies, Sebi has proposed revising the method used to determine the base price. Under the new method, the latest traded price will be considered only if it is not older than six months. Where such market prices are unavailable, the regulator has suggested using valuation certificates issued by independent valuation agencies. In cases where shares are relisted after remaining suspended for more than six months, Sebi has proposed that the base price should be determined using the lower of the book values assessed by two separate independent valuers.

Sebi's proposed flexibility mechanism

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To improve the system, Sebi has proposed a revised flexing mechanism under which stock exchanges would automatically widen the dummy price band by 10 percent whenever the indicative equilibrium price nears the upper or lower limit. The regulator also wants exchanges to automatically expand the band if buy or sell orders accumulate only at the extreme ends of the range, provided there are orders from at least five unique PAN-based investors. The proposed flexibility mechanism may also be extended to SME IPOs, a segment where such provisions are currently absent despite relatively higher volatility.

At present, IPOs and relisted stocks undergo a one-hour pre-open call auction session between 9 am and 10 am on the first day of listing or relisting. This process is used to determine the equilibrium price before regular market trading begins. Sebi has proposed making the call auction process valid only if the equilibrium price is discovered based on orders from at least five unique PAN-based buyers and five sellers. In cases where price discovery fails for relisted companies or firms undergoing corporate restructuring, the auction process may continue on subsequent trading days until an equilibrium price is successfully established.

The regulator has invited public comments on the proposals until June 11.