Securities and Exchange Board of India (SEBI) has suggested significant changes in the calculation of stock prices during IPO listings and re-listings. The current price discovery system is seen as artificially keeping prices low, leading to repeated upper circuits once trading commences, according to the market regulator. SEBI’s proposal includes an automatic and prompt adjustment of price bands in response to strong investor demand, aiming to minimize manual intervention by exchanges.
The regulator emphasized the need for a uniform mechanism across exchanges to adjust price bands swiftly when necessary, ensuring that the adjustment is made immediately. It suggested that exchanges should adjust the dummy price bands in increments of 10 percent based on predefined logic or in consultation with other exchanges. Additionally, SEBI recommended that this adjustment mechanism should also function during the random closure period from 09:35 am to 09:45 am.
SEBI highlighted the issue of existing guardrails rejecting numerous legitimate buy orders during the pre-open auction session, hindering the market from establishing a fair opening price. An example was provided where about 90 percent of buy orders in a re-listed stock were rejected due to bids falling outside exchange-imposed ranges. Furthermore, SEBI proposed a complete revamp in determining starting prices for re-listed companies, suggesting the use of recent market prices or independent valuation reports instead of outdated or artificially low reference prices.
According to SEBI, a successful Call Auction Session should be based on orders from at least 5 PAN-based unique buyers and sellers. Currently, there is no price band for the Call Auction Session of SME IPOs; however, due to the volatility in SME listed prices, stock exchanges have imposed a price band of over 90 percent without specific flexing criteria.
