Sebi proposes new price-discovery mechanism for IPOs.

Sebi proposes wider auction bands and stricter norms for IPOs and re-listed stocks to improve price discovery and curb distorted trading

Market regulator Securities and Exchange Board of India (Sebi) has proposed changes to the price-discovery mechanism for initial public offerings (IPOs) and re-listed stocks during the pre-open call auction session.

Under the proposed revised framework for determining the base price of re-listed shares, Sebi has suggested that the latest traded price should not be older than six months. In cases where such prices are unavailable, the base price may be derived from valuation certificates issued by independent valuation agencies.

For stocks re-listed after more than six months of suspension, the regulator has proposed using the lower of the book values determined by two independent valuers.

Besides re-listings, Sebi has also proposed an overhaul of the mechanism used to determine the opening price for IPOs after representations received by the regulator indicated that the current “dummy price band” mechanism and base price methodology are leading to inefficient price discovery.

The regulator noted one case where 90 per cent of buy orders during the call auction session were rejected because they were outside the prescribed price bands.

IPO stocks currently have a dummy price band of minus 50 per cent to plus 100 per cent from the base price, while SME IPOs are capped at plus or minus 90 per cent without any flexing mechanism.

The regulator has now proposed changes to the flexing mechanism for dummy price bands. Exchanges would be required to automatically widen the bands by 10 per cent whenever the indicative equilibrium price approaches the upper or lower thresholds.

Additionally, if buy or sell orders accumulate only at the extreme ends of the price band, exchanges may automatically widen the range after validating orders from at least five PAN-based unique investors.

Importantly, Sebi has proposed extending the flexing mechanism to SME IPOs as well, where no such flexibility currently exists despite heightened volatility in the segment.

At present, IPOs and re-listed securities undergo a one-hour pre-open call auction session between 9 am and 10 am on the first day of listing or re-listing. The mechanism is used to determine the equilibrium price before normal trading begins.

The regulator has further proposed that a call auction session would be considered successful only if price discovery is based on orders from at least five unique PAN-based buyers and sellers. If price discovery fails in re-listed stocks or cases involving corporate restructuring, the call auction would continue on subsequent trading days until an equilibrium price is discovered.

Sebi has invited public comments on the proposals until June 11.

For fair discovery

Sebi flags distorted price-discovery concerns for IPOs, re-listed stocks

Proposes an overhaul of the pre-open auction mechanism

Exchanges may widen price-discovery bands for more accurate discovery

Five unique investors needed for band expansion

Recent traded price to be referenced for re-listings

Independent valuation route proposed if recent price unavailable

Rules apply to both mainboard and SME listings

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