The capital markets regulator, the Securities and Exchange Board of India (SEBI), has proposed changes to the price discovery mechanism used during the pre-open call auction session for IPOs and relisted stocks, citing concerns that the current framework may be distorting prices and suppressing genuine market discovery.
In a consultation document published on Tuesday, SEBI noted that numerous market participants had expressed concerns about the current dummy price band system and the base price determinations for relisted stocks, which were creating artificial market distortions. The regulator indicated that this has frequently led to heightened buying pressure at the start of regular trading, resulting in upper circuit limits and additional monitoring actions.
At present, IPOs and relisted stocks participate in a one-hour pre-opening call auction session from 9 AM to 10 AM on their listing day, where only limit orders are allowed. SEBI noted that exchanges use various methods to calculate base prices for relisted stocks, whereas IPOs use the issue price as their base price.
Concerns over dummy price bands and price discovery
SEBI noted that the current dummy price bands might hinder effective price discovery. According to existing regulations, IPO stocks are allowed to trade within a dummy price range of -50% to +100% of the base price during the pre-open session. For relisted stocks, the permissible band is minus 85% to plus 50%, while SME IPOs can function within a range of minus 90% to plus 90%.
The regulator mentioned an instance in which nearly 90% of buy orders during the call auction session for a relisted stock were rejected for being outside the allowed price bands.
SEBI clarified that equilibrium prices during the session are determined by the maximum volume of executable orders. If equilibrium prices vary across exchanges, a unified equilibrium price is determined by volume-weighted averages.
The regulatory body has requested public input on whether modifications to the existing framework are needed to boost efficiency, improve price discovery, and minimise distortions, in light of changing market conditions and trading practices.
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