SEBI Proposes Changes To IPO, Re-Listed Stock Price Discovery Rules

Markets regulator Securities and Exchange Board of India (SEBI) has proposed changes to the way opening prices are discovered for initial public offerings (IPOs) and re-listed stocks, saying the current system may be preventing proper price discovery in several cases.

The proposals are part of a consultation paper released by SEBI after market participants raised concerns over how stocks behave during the pre-open call auction session on listing day.

How The Existing System Works

Right now, IPOs and re-listed stocks go through a one-hour pre-open call auction session between 9 am and 10 am on the first trading day. During this window, only limit orders are allowed and exchanges determine the opening price based on matching buy and sell orders.

For IPOs, the issue price is used as the base price. In the case of re-listed stocks, exchanges follow different methods to arrive at a base price depending on the suspension period and trading history.

SEBI said the existing approach has created problems in some re-listed stocks, especially those returning to trading after long suspensions. In several cases, the reopening price ends up being linked to face value or old book value figures that may no longer reflect the company’s actual worth.

Price Band Concerns

The regulator also flagged concerns around dummy price bands used during the call auction session.

At present, IPO stocks can trade within a range of minus 50% to plus 100% of the base price during the pre-open session. Re-listed stocks are allowed within a band of minus 85% to plus 50%, while SME IPOs operate within a range of minus 90% to plus 90%.

According to SEBI, these limits may sometimes block genuine demand from getting reflected in prices. The regulator cited one instance where almost 90% of buy orders in a re-listed stock were rejected during the call auction because they were outside the permitted range.

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SEBI On Equilibrium Price Rule, Seeks Feedback

SEBI further clarified that equilibrium prices during a trading session are based on the maximum volume of executable orders. If different exchanges show varying equilibrium prices, a single unified price is derived using volume-weighted averages.

The regulator has also sought public feedback on possible changes to the existing framework to improve efficiency, strengthen price discovery, and reduce market distortions.

Sources:

Livemint

SEBI