SEBI Seeks Changes To IPO, Relisted Stock Price Discovery Process

The Securities and Exchange Board of India (SEBI) has proposed changes to the price discovery mechanism followed during the pre-open call auction session for initial public offerings (IPOs) and relisted stocks.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

In a consultation paper released on Tuesday, the market regulator said the existing framework may be creating distortions in the trading process and affecting genuine price discovery during stock listings and relistings.

SEBI said concerns had been raised by several market participants regarding the current dummy price band mechanism and the methodology used by stock exchanges to determine base prices for relisted shares.

According to the regulator, these issues have at times resulted in sharp buying pressure once regular market trading begins, often pushing stocks into upper circuit limits and triggering enhanced surveillance measures.

Existing Pre-Open Mechanism

Currently, IPO shares and relisted stocks undergo a one-hour pre-open call auction session between 9 AM and 10 AM on the listing day. During this period, only limit orders are permitted.

For IPOs, the issue price is treated as the base price for trading during the pre-open session. In the case of relisted shares, stock exchanges follow different approaches to determine the base price.

SEBI noted that the present price bands vary depending on the category of stock.

IPO shares are currently allowed to trade within a dummy band of -50% to +100% of the base price during the pre-open session. Relisted stocks are permitted within a band of -85% to +50%, while SME IPOs can trade within a range of -90% to +90%.

Regulator Flags Concerns Over Order Rejections

SEBI said the current framework could be limiting efficient price discovery in certain cases.

The regulator cited an instance where nearly 90% of buy orders placed during the pre-open auction session for a relisted stock were rejected because the bids were outside the permitted price range.

According to SEBI, equilibrium prices during the call auction process are determined based on the maximum executable order volume. If exchanges arrive at different equilibrium prices, a unified equilibrium price is calculated using a volume-weighted average method.

The regulator indicated that narrow or uneven dummy price bands may sometimes prevent genuine demand and supply from reflecting accurately during the auction process.

Public Consultation Underway

SEBI has invited public comments on whether the existing framework requires modifications to improve efficiency and reduce market distortions during listing-day trading.

The regulator said the review comes amid evolving trading practices and increased participation in primary and secondary equity markets.

The consultation paper seeks views on possible changes that could strengthen transparency, improve order execution efficiency and support more effective price discovery for newly listed and relisted companies.

Public feedback on the proposals will be considered before SEBI takes a final decision on any amendments to the current mechanism.