The Securities and Exchange Board of India (SEBI) has announced some major changes to the price discovery mechanism in initial public offerings (IPOs) and relisted stocks in the pre-open call auction session which will help enhance the efficiency of the capital markets and eliminate pricing distortion in newly listed stocks.
Key Highlights
- SEBI to revamp IPO auction rules to strengthen listing-day price discovery efficiency nationwide.
- New framework aims to reduce dummy price distortions and improve transparent market opening mechanisms.
In a consultation paper issued, SEBI pointed out the rising apprehensions by the market participants regarding the current “dummy price band” mechanism and discrepancies in fixing the base price for relisted stocks. With the current framework, the regulator said it could be limiting real price discovery and causing price distortions that can lead to some extreme price swings that follow regular market opening.
Currently, IPOs and stocks that are already listed have a pre-open call auction session of one hour between 9 AM and 10 AM on the listing day. At this time, only limit orders will be allowed and the market will determine the price at which it opens, before regular trading begins.
On an initial public offering, the issue price is used as the starting price for the call auction; on relisted stocks, the methods of calculations vary depending on the exchange. SEBI observed that this is not standardized has created concern in the operation and could impact the price discovery.
Dummy Price Bands Under Scrutiny
As per existing rules, IPO shares are allowed to trade in a dummy price band of minus 50% to plus 100% of the issue price during the pre-open session. The allowable range is minus 85% to plus 50% for stocks on the list, and minus 90% to plus 90% for SME IPOs.
SEBI considers that these prescribed ceilits could be limiting participation in natural market. In the example provided, almost 90% of buy orders were rejected when the stock was called during a relisted session because they were out-of-the-suggested price range, reducing the amount of actual market-driven price discovery.
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Addressing Artificial Market Distortions
SEBI noted that the current design tends to result in heavy buying pressure when the stock starts trading, causing it to go up to the upper circuit limit and setting off increased surveillance. The results can generate false signals in the valuation of the stock and can mislead investors during important early trading hours.
The proposed reforms aim at bringing the auction process closer to the actual supply and demand of the investors and making the price stabilisation smoother.
Public Consultation Invited
SEBI has sought comments from investors, brokers, exchanges and other participants on whether the existing system can be changed to suit the changing trading practices and make the trading system more efficient.
The consultation comes as a part of the SEBI's ongoing initiative to improve public listings, the number of which has been surging in recent times, with the growing number of retail investors and a renewed investor appetite for capital markets. Any changes implemented could significantly reshape listing-day trading behaviour and enhance transparency for investors.
