For better price discovery of initial public offerings (IPOs) and re-listing of shares, the Securities and Exchange Board of India (Sebi) has proposed reviewing the price discovery mechanism through the pre-open call auction session. The proposals released on Thursday follows comments from market players about artificially suppressed price discovery for re-listings and volatility on listing days. Public comments on the recommendations are to be submitted by June 11.
These changes, if implemented, could enable automatic and faster expansion of price bands in case of high investor demand and reduces the need for stock exchange’s manual intervention. Sebi made a series of recommendations followings its consultation with the Secondary Market Advisory Committee on matters such as base price, dummy price, and price discovery. Meanwhile, no changes are proposed for the issue price of a scrip.
The call auction session, a one-hour window before regular trading session starts, for IPO and re-listing shares was introduced in January 2012, functioning at a dummy price band to avoid fat finger errors or order at non-genuine prices.
Flawed Guardrails
Sebi said that existing guardrails during the pre-open session were rejecting large buy orders, leaving little room for the market to find a fair opening price. The regulator also cited an instance when 90% of buy orders for a re-listed stock were rejected due to bids falling outside the exchange imposed ranges.
Automated Risk Flexing
While the existing call auction session for base price is proposed to be followed for IPOs, a few changes are suggested for re-listing scrips. For shares revoked within six months from the date of suspension, it is proposed that the latest close price is to be considered as the re-listing base price.
In case of non-availability of the latest closing price, the lowest book value as provided by valuation certificates of two independent chartered accountants should be considered as base price. This criteria is proposed to be practiced for shares revoked six months after the date of suspension.
The advisory committee had recommended that the call-auction session should reflect the re-listing scrip’s present value. Also, stock exchanges should introduce a more appropriate and realistic methodology based on the ‘book value’ of the scrip to determine the base price, as per the consultation paper.
While the exiting dummy price band as a risk mitigation measure will be continued by stock exchanges during the call auction session, Sebi proposed a few changes for the flexing of dummy price band. Stock exchanges shall flex the dummy price bands in multiples of 10% automatically based on pre-defined logic or in consultation with other exchanges. It also proposed that price discovery in the pre-open session should have at least five distinct buyers and sellers to ensure broader participation.