The regulator observed that the current practice frequently suppresses genuine price discovery.
The Securities and Exchange Board of India (SEBI) has proposed significant changes to the price-discovery framework for initial public offerings (IPOs) and re-listed companies during the pre-open call auction session, aiming to address concerns over distorted pricing and excessive volatility in newly-traded stocks.
In a recent consultation proposal, SEBI said the current mechanism for determining the base price of re-listed shares often results in artificially low valuations, leading to abnormal trading patterns once the stock enters the regular market session.
The regulator noted that multiple representations from market participants highlighted weaknesses in the existing dummy price band mechanism and the methodology used for fixing base prices in re-listed securities.
Under the revised framework, SEBI has proposed that the latest traded price used for determining the base price of a re-listed stock should not be older than six months.
In cases where no recent trading data is available, exchanges may rely on valuation certificates issued by independent valuation agencies to determine a fair reference price.
The regulator observed that the current practice frequently suppresses genuine price discovery.
As a result, stocks often witness intense buying pressure immediately after listing or re-listing, repeatedly hitting upper circuit limits in the normal trading session. This, SEBI said, also triggers Additional Surveillance Measures (ASM) imposed by stock exchanges to curb volatility.
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Highlighting the issue, SEBI cited an instance where nearly 90% of buy orders placed during the call auction session of a re-listed stock were rejected because they fell outside the prescribed price bands.
Such restrictions, according to the regulator, undermine efficient market functioning and prevent fair participation by investors.
At present, if a company’s trading suspension has been revoked after more than one year, the base price for the call auction session is determined using either the book value calculated within the previous six months or the face value of the share, whichever is lower.
In most cases, this results in a starting base price of just Rs 10, regardless of the company’s actual market potential or underlying value.
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SEBI said the revised framework seeks to ensure that the base price of re-listed securities better reflects their present financial and business value.
The regulator added that stock exchanges should adopt a more realistic methodology based on updated book value assessments and independent valuation metrics.
However, SEBI clarified that no changes have been proposed for the base price mechanism applicable to IPO shares, where the issue price will continue to serve as the reference price.
The regulator also reviewed the functioning of dummy price bands used as a risk-management tool during call auction sessions for both IPOs and re-listed stocks.
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SEBI recommended retaining the existing system but proposed a uniform flexing mechanism across all exchanges. The revised proposal states that whenever required, the widening or “flexing” of price bands should be implemented immediately to facilitate smoother price discovery.
The issue is particularly relevant in the SME IPO segment, where stock exchanges currently impose a price band of plus 90% during the call auction session despite the absence of a formal price cap in regulations.
SEBI noted that the sharp volatility often witnessed in SME listings necessitates a review of the current framework to ensure more balanced and efficient trading conditions.
Additionally, the regulator endorsed continuing the existing special call auction mechanism used for listed Investment Companies (ICs) and Investment Holding Companies (IHCs).
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Under this framework, price discovery is considered successful only if orders are received from at least five PAN-based unique buyers and five unique sellers. If price discovery is not achieved on the first day, the call auction process continues on subsequent trading days until a market-driven price is established.
© The Indian Express Pvt Ltd
